Beruflich Dokumente
Kultur Dokumente
Energy Sector
Management
Assistance
Program
Report 321/06
June 2006
ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP)
PURPOSE
ESMAP is a knowledge partnership supported by the World Bank and official donors
from Belgium, Canada, Denmark, Finland, France, Germany, the Netherlands, Norway, Sweden,
Switzerland, and the United Kingdom. ESMAP has also enjoyed the support of private donors as
well as in-kind support from a number of partners in the energy and development community.
FURTHER INFORMATION
For further information on a copy of the ESMAP Annual Report or copies of project
reports, please visit the ESMAP website: www.esmap.org. ESMAP can also be reached by
email at esmap@worldbank.org or by mail at:
ESMAP
c/o Energy and Water Department
The World Bank Group
1818 H Street, NW
Washington, D.C. 20433, U.S.A.
Tel.: 202.458.2321
Fax: 202.522.3018
Experiences with Oil Funds:
Institutional and Financial Aspects
June 2006
iii
Overview ............................................................................................................. 55
The legal status of the NGPF .............................................................................. 58
Flows of money into and out of the fund ............................................................. 59
The management and investment policy of the fund........................................... 61
Governance of the fund....................................................................................... 65
Financial performance of the NGPF.................................................................... 65
Assessment......................................................................................................... 67
iv
H. The Investment Fund for Macroeconomic Stabilization of the
República Bolivariana de Venezuela (FIEM)......................................... 113
Assessment ........................................................................................... 114
I. The Oman State General Reserve Fund (OSGRF)............................... 114
Assessment ........................................................................................... 115
J. Oil Stabilization Fund (OSF) of the Russian Federation........................ 115
Assessment ........................................................................................... 116
K. The Reserve Fund for Future Generations (RFFG) of Kuwait............... 116
Assessment ........................................................................................... 118
v
D. The governance of the fund................................................................... 136
1. Multilevel oversight .................................................................... 136
2. Annual reports ........................................................................... 136
3. Publication of the fund’s performance ....................................... 137
4. Publication of audit .................................................................... 137
5. Use of Web sites........................................................................ 137
Appendix 2: Alaska’s Constitution and Law Pertaining to the Permanent Fund.. 151
Appendix 5: Laws and Decrees Concerning Oil Revenue Management in Chad . 191
vi
Appendix 7: The São Tomé and Príncipe Oil Revenue Law.................................... 239
List of Figures
Figure 6.2: Simplified Diagram of Oil Revenue Flows in Chad as Provided for in Law
001/PR/99, as amended, Decree 238/PR/MEF/03, and
Decree 239/PR/MEF/03 ...................................................................................... 92
List of Tables
Table 2.1: The Organization and Administration of the Original AHSTF* ....................... 26
Table 2.3: Composition of the AHSTF, March 31, 1988 (current Can$ million) .............. 29
Table 2.4: Actual and Benchmark Portfolio Performance of the AHSTF for Year
Ended March (returns measured in Can$) ........................................................ 30
Table 3.2: Actual and Benchmark Portfolio Performance of the APF for Year Ended
June (returns measured in US$) ......................................................................... 50
Table 3.3: Rolling 10-Year Nominal and Real Returns of the APF
(measured in US$) .............................................................................................. 51
Table 4.1: Net Transfers to the NGPF and the Accumulated Fund in Current Billions
of NKr (US$1 = NKr 6.08, Dec 31, 2004) ............................................................ 61
Table 4.2: Risk Exposure Limits Stipulated by the Petroleum Fund Regulation ............. 64
Table 4.3: Annual Nominal and Real Return Measured in Terms of the Fund’s
Currency Basket 1997–2004 (percent) ............................................................... 66
vii
Table 4.4: Norges Bank’s Contribution to the Return on the NGPF (percentage
points).................................................................................................................. 66
Table 5.1: Flows into and out of State Oil Funds in Current Billion Manats and
Annual Returns at December 31a ....................................................................... 78
Table 5.2: SOFAZ Assets, December 31, 2004 (current US$ million) ............................ 79
Table 6.1: Budget Revenues from Oil and the NFRK at December 31 (current US$
millions) ............................................................................................................... 86
Table 6.3: Flows into and out of the MRSF (current million kina) ................................. 109
Table 7.1: Indicators of the Relation of the Oil Sector to the Economy, 2004............... 121
Table 7.2: Basic Financial Statistics for Certain Oil Funds ........................................... 123
viii
Acknowledgments
This report presents the results of a study undertaken by members of the Oil, Gas and
Mining Policy Division of the World Bank, as part of the Thematic Area on Energy
Security of the Energy Sector Management Assistance Program (ESMAP) managed by
the World Bank.
The task manager for the study was Silvana Tordo (Oil, Gas and Mining Division) and
the study was undertaken and written by Robert Bacon (consultant) and Silvana Tordo.
The comments of the peer reviewers—Charles McPherson (Oil, Gas and Mining
Division), Alan Gelb (Office of the Senior Vice President, Development Economics) and
Rolando Ossowski (International Monetary Fund)—are gratefully acknowledged. Other
valuable comments were received from Dominique Lallement (Energy Adviser,
ESMAP), Jennifer Johnson-Calari (Banking, Capital Markets and Financial Engineering
Department), Christian Petersen (Poverty Reduction and Economic Management Unit,
Europe and Central Asia), and Sarah Lacoche, Mauricio Villafuerte, and Paulo Medas
(International Monetary Fund). Dominique Lallement provided the final review. Special
thanks go to Scobie Marsh for editing the paper, Esther Petrilli-Massey and Carmen
Pineda for formatting and to Marjorie Araya for designing the cover and coordinating the
publication process.
ix
Abbreviations and Acronyms
$A Australian dollar(s)
ACG Azeri-Chirag-Gunashli (oil fields in Azerbaijan)
AHSTF Alberta Heritage Savings Trust Fund
AID Alberta Investment Division
APF Alaska Permanent Fund
APFC Alaska Permanent Fund Corporation
BEAC Banque des Etats de l’Afrique Centrale
BTC Baku-Tbilisi-Ceyhan (oil pipeline of SOCAR)
Can$ Canadian dollar(s)
CBRF Constitutional Budget Reserve Fund
CCF Chilean Copper Fund
CCSRP Collège de Contrôle et de Surveillance des Ressources
Pétrolières (Chad)
CEMAC Communauté Economique et Monétaire de l'Afrique
Centrale
CID Canada Investments Division
CO2 Carbon Dioxide
COBAC Commission Bancaire de l'Afrique Centrale
CPD Capital Projects Division
CPI consumer price index
EAFE Europe, Australasia, and the Far East
EID Energy Investment Division
EPD Economic Policy Department
ESMAP Energy Sector Management Assistance Program
FGF Future Generations Fund
FIEM Investment Fund for Macroeconomic Stabilization
[Fondo de Inversión Para la Estabilización
Macroeconómica] (República Bolivariana de
Venezuela)
xi
FMS Fund for Macroeconomic Stabilization (República
Bolivariana de Venezuela)
FTSE Financial Times Stock Exchange
GDP Gross Domestic Product
GRF General Revenue Fund
IBRD International Bank for Reconstruction and
Development
IMF International Monetary Fund
KIA Kuwait Investment Authority
KIO Kuwait Investment Office
LIBOR London interbank offered rate
MDRC Mineral Resources Development Corporation (Papua
New Guinea)
MRSF Mineral Resource Stabilization Fund (Papua New
Guinea)
MSCI Morgan Stanley Capital International
NBIM Norges Bank Investment Management (Norway)
NFRK National Fund of the Republic of Kazakhstan
NGO Nongovernmental Organization
NGPF Norwegian Government Petroleum Fund
Nkr Norwegian krone
NPRTF Nauru Phosphate Royalty Trust Fund
OECD Organisation for Economic Co-operation and
Development
OSF Oil Stabilization Fund (Russian Federation)
OSGRF Oman State General Reserve Fund
POMV Percentage of Market Value
PRSP Poverty Reduction Strategy Paper
RFFG Reserve Fund for Future Generations (Kuwait)
Rub ruble(s)
SOCAR State Oil Company of the Azerbaijan Republic
SOFAZ State Oil Fund of the Azerbaijan Republic
xii
STPPF São Tomé and Príncipe Permanent Fund
SWGB Salomon World Government Bonds Index
TLPF Timor-Leste Petroleum Fund
UN United Nations
VAT Value Added Tax
xiii
Executive Summary
1. In the last 30 years, a number of countries have adopted the use of oil
funds, in which a portion of government revenues from oil (and gas) is deposited, for
various purposes. Recently, interest in the reasons for the creation of such funds, and the
mechanics of doing so, has greatly increased, in part as a result of the emergence of
several new oil-producing nations, and in part because current high oil prices give an
opportunity to governments to save now in order to provide for future spending if oil
revenues decline.
2. This study brings together detailed information on the creation, operation,
and financial performance of 12 oil funds and 3 other resource funds. The purpose of the
study is to provide comparative information on the backgrounds of the creation of these
funds, the legislation used to do so, the details of the organization and management of the
funds, and of their financial performance. By bringing together in one study comparative
information of different funds and their approaches to saving oil revenues, it is hoped to
provide policy makers in countries considering the establishment of an oil fund with a
reference document on the various approaches that might be used. A particular feature of
the study is the inclusion of legislation setting up some of these funds, because countries
wishing to do so will need to consider a number of detailed issues that can be treated in
various ways through the legislation adopted.
3. However, the report does not take the additional step of analyzing the
historical interactions between the government’s budgetary policy and the operation of
the fund. To make an assessment of the performance of a fund in a macroeconomic
context would require a detailed investigation of fiscal policy and economic performance,
and their likely outcomes in the absence of the fund and resource revenues. For many
countries the experience with resource revenues and funds has been too short to permit
such assessments to be made. The relationship between the structure and operations of a
fund and the country’s political system would also need to be further investigated. This is
a somewhat broader accent than that of concern to this paper. Subsequent studies on the
performance of resource funds are likely to pick up these themes.
4. The report opens with a brief review of the reasons for establishing an oil
fund and the principal issues in doing so. This topic has been covered extensively in a
number of other publications, and accordingly the review serves only as a guide to these
issues. References are provided for readers who wish to obtain more information on these
aspects.
5. The report then provides detailed coverage of four oil funds where there is
substantial public information about the operation and performance of the funds (Alaska,
Alberta, Azerbaijan, and Norway). The next chapter gives more limited information on
funds in another 11 countries. For three of these countries (Chad, São Tomé and Príncipe,
and Timor-Leste) the legislation is available and included, but because they have either
not started to accumulate yet, or have made only first payments into the fund, there are no
data yet on their performance. For another three countries (Chile, Nauru, and Papua New
Guinea), the funds are concerned with revenues from minerals rather than from oil, but
1
2 Experiences with Oil Funds: Institutional and Financial Aspects
they are included because their operation and performance are of especial relevance to oil
funds. For Kazakhstan, Kuwait, Oman, the República Bolivariana de Venezuela, and
Russia, details of the establishment, operation, and performance are to various extents
much more limited, but these cases have been included as background information.
6. A final chapter provides some comparative material on the different funds
and explores the construction of a set of indicators for good practice in the design of the
funds. The appendixes contain the legislation creating and governing the funds, where
this is available
1
The Use and Nature of Oil Funds
3
4 Experiences with Oil Funds: Institutional and Financial Aspects
macroeconomic problems (such as Dutch disease) that the creation of the fund was
designed to avoid.
• Net payment into a special line item in the treasury accounts, identified as
“the oil fund” but held and managed with all other government assets (the
so called “virtual fund”);
• Net payment into a separately held fund(s) accounted and managed
separately from the government’s general financial assets.
1.9 The experience of the oil shocks of the 1970s and 1980s, when oil prices
rose very sharply, persuaded a number of governments to establish oil funds. Different
approaches were followed in these earlier experiences, reflecting different objectives and
different political systems, and the lessons learned from these have been incorporated
into more recent oil funds being established by countries that have recently begun oil
production.
1.10 The establishment of an oil fund involves a number of practical issues
(Timor Leste Government 2004), which include:
• Formalization of the objectives of the fund in the context of overall fiscal
policy;
• Legal foundation of the fund;
• Rules determining the payments into and out of the fund;
• Arrangements for the financial management of the fund;
• Nature of the oversight of the fund.
These issues are discussed in the following sections.
1
It should be noted that the social discount rate should be used to value benefits for future generations.
However, generally, the discount rate is based on the return on financial assets.
The Use and Nature of Oil Funds 9
the resources are fully commingled with other government financial resources, or
whether it is “real” and held separately from the rest of government assets.
• A virtual fund, as part of the normal budgetary process, needs no special
approval to establish it or to manage it—the creation of another line item
in the budget and treasury accounts gives no new responsibilities. Money
can be paid into this fund or drawn out of it purely as for any other
expenditure in the budgetary process and is covered by whatever
legislation, regulations, and tradition are used in drawing up and executing
budgetary decisions. Of course, target principles for adding or
withdrawing from the virtual fund can be created, but these can be as for
other items of policy, similar to those determining how much to spend on
education and so forth. What might need to be additional is some public
explanation of the principles guiding the overall accumulation of public
savings and of the use of the additional revenues to the government that
make the creation of such a fund possible. The financial management of
money accumulated in a “virtual” fund can also be identical to that for all
government financial assets, because they are commingled.
• A real fund, such as a future generations fund or a stabilization fund,
where the accumulated assets are held in a separately managed and
audited account, needs a legal framework for its establishment, control,
oversight, management, use, and dissolution. Depending on the legal
system, this can be done by a constitutional amendment or by the creation
of a law or regulation. Because countries with newly developed natural
resources will typically need to pass a general law dealing with ownership,
production, and so on of the resource, it is possible to include in such a
law provisions for the establishment of any special funds required, as well
as rules that relate to payments to the fund and the use of accumulated
reserves. Where the fund is established subsequent to the onset of
production and the establishment of a resource law, it may be simpler to
deal with the establishment of a separate fund by a purpose-designed law.
1.15 The same fiscal and long-term objectives can be obtained through the use
of either a virtual or real fund. The preference for one or the other may depend on the
overall transparency of fiscal reporting to both the legislature and the public. The
creation of a real fund may highlight the link between resource generation and resource
utilization, thus becoming a useful political tool.
1.16 The advantages and disadvantages of using a constitutional amendment, or
the amendment of a resource extraction law, to establish a real oil fund are symmetric.
On the one hand, the existence of such a fund is more firmly entrenched by a
constitutional amendment, because this typically requires a larger majority to overturn it.
On the other hand, constitutional amendments are slower to be passed and need greater
support. In particular, where the rules on the operation of any such fund (payments in,
withdrawals, and their uses) are specified in a constitutional amendment, the inflexibility
of this approach will ensure the financial integrity of the scheme, but will also make it
difficult to respond to unforeseen circumstances, such as a natural disaster or war, where
10 Experiences with Oil Funds: Institutional and Financial Aspects
governments might suddenly wish to draw more heavily on accumulated assets but be
unable to do so. Funds where operations may be determined by the executive (for
example, the cabinet), not needing formal parliamentary approval, are more flexible in
responding to changed circumstances, but their whole purpose is correspondingly easier
to reverse or pervert by a subsequent administration.
are peaking at a time of high oil prices, as would be the current situation
for some oil producers, there is a good reason for trying to accumulate
some of the exceptionally large revenue because they are likely to face
revenue declines that would make smoothing expenditure difficult in the
absence of a fund to draw upon.
1.18 Although the reasons for the accumulation of assets may address different
issues in terms of stabilization, savings, or both, there is no reason to establish separate
funds, or even separate accounts within a single fund, to meet these objectives. A
stabilization fund is of necessity also a savings fund because the average amount held in
the fund earns a return that can be used to provide future welfare benefits. However, the
amount retained solely to stabilize the budget against possible swings in the oil revenue
would generally not be adequate to provide a financial return that keeps permanent
income constant. Savings funds, when they are integrated with the budget process, may
also exhibit a stabilization function because the amounts paid into the fund will normally
vary according to the current price and the expected future revenues, which have to be
recalculated as expected prices and production change.
1.19 Once the target size of the fund has been determined in the context of
planned overall government saving, the rules for adding to it follow. The most
prescriptive approach has been to legislate that a given proportion of oil revenues be paid
into the fund (either directly or through the treasury) and that all income and capital must
remain in the fund and may not be withdrawn until legislation provides otherwise. This
approach is seen as one to give the maximum emphasis on the use of the fund for saving
for future generations, because it cannot be easily utilized for budget stabilization. A
slightly more flexible approach has been to allow some or all of the income of the fund,
but none of the capital, to be withdrawn into the budget process at the determination of
the executive or legislature. In some cases, this has been relaxed further to allow
withdrawal of part of the capital. It should be noted that, although many funds prohibit
borrowing against the fund’s resources, governments may still be able to increase debt.
Where the cost of the debt is above the return on government investment, this policy
should be avoided.
1.20 Simulations of alternative savings and expenditure rules have been carried
out for some recently established funds. An interesting example is provided by an
analysis of a possible revision to the Kazakhstan fund rules (Hausmann and others 2004).
The analysis proposed a compromise between a “permanent income approach” in which
only the permanent income of the expected oil wealth could be spent each period, and a
“bird in hand” approach where only the income from the fund could be spent each period.
Figure 1.1 below illustrates the revenue flows to the budget and to the fund in the case of
Kazakhstan.
12 Experiences with Oil Funds: Institutional and Financial Aspects
1.21 For stabilization funds, rules are needed to determine when additions
should be made to the funds and when there should be withdrawals. These amounts are
linked to the budgetary process and revenue forecasting, because the sums involved are
intended to allow expenditure smoothing. Generally, parliamentary or presidential
approval is used to authorize such transfers. In certain cases, countries have actually
formalized the rules governing the use of stabilization funds so that amounts added or
withdrawn are automatic. Such rules require that long-term revenue forecasts, which are
used to plan budget expenditures, be made, and then unanticipated revenues are adjusted
through the use of the fund. Even in this approach, the parliament or president needs to
authorize the planned budget expenditures around which the stabilization has to work.
1.22 A different approach has been to make payments into the fund, and
withdrawals from the fund, discretionary. Guiding principles for payments and
withdrawals, especially for budget stabilization and sterilization purposes, can be
formulated, but need not be adhered to in times of need. This approach gives the greatest
room for maneuver in times of varying need (such as that caused by sudden large changes
in the oil price) and also gives the greatest opportunity to the executive or legislature to
change the purposes of the fund. A fund whose original purpose was to provide some
resources for future generations could be more easily extinguished in the case where all
resources can be withdrawn without any legislative change. Stronger political discipline,
and adherence to long-term objectives, is required to operate such a scheme. The weakest
form of control is one in which the executive alone makes decisions on payments and
withdrawals, with no ex ante reference to the legislature. The submission of ex post
accounts for the fund to the legislature allows comments to be made on these decisions,
but does not easily permit them to be reversed.
1.23 The choice of a rules-based or a discretionary-based approach raises a
difficult tradeoff. In the end, all rules can be changed, so that the issue is less one of rules
per se, but rather of the political cost of changing the rules. The problem with pure
discretion is that no alarm bells will go off when policies are imprudent—rules can create
these alarm bells. However, pure and rigid rules can at some stage cease to be credible,
The Use and Nature of Oil Funds 13
and without some organized process of exception, the cost of modifying or voiding or
evading them can be very high.
expected (for example, in the health sector or national parks) requires particular
competence of the investment managers, because these are not the type of investment
decisions usually made by experienced financial fund managers. This approach also risks
duplication with the normal budgetary expenditures, with resulting loss of efficiency.
Where the operation of the fund is not open to ex ante parliamentary scrutiny and
approval, this route experiences less control and oversight than does the main budgetary
process, and indeed it can undermine the integrity of the budget process.
1.29 The government also has to decide who will manage the investments of
the fund. Generally, the government sets up a body comprising fund trustees but
delegates responsibility for the management of the fund to the central bank, which would
then have the discretion to engage third-party custodians and specialist asset managers
for the safekeeping and investment of the assets. Asset management mandates may be
structured based on global total return objectives or based on a benchmark representing a
specific investment universe. In the latter case, manager performance is based on excess
returns versus the benchmark adjusted for the amount of risk assumed. Fund trustees, or
their delegates, are responsible for hiring, performance review, and subsequent fund
allocation decisions. All of these steps should be transparent, so that reasons for hiring
and changing managers are known generally, and the performance of the fund against the
benchmarks should be publicly available. Many countries with revenue funds publish
annual reports, which are submitted to parliament for approval.
cannot be easily changed to reflect the interests of any group within the country. Some
legislatures have not only formulated the principles under which oversight bodies should
be selected and, if necessary, dismissed, but have also mandated criteria for selection (for
example, previous business experience).
1.33 A good governance principle (Petersen and Budina 2003, Heilbrunn 2002)
is that there should be simultaneous vertical and horizontal accountability. Vertical
accountability is present in the reporting line of the management of the fund that
continues up the hierarchy until it meets a minister. Horizontal accountability operates
through two mechanisms: (1) elected officials independent of government receive regular
reports on portfolio performance, and (2) readily available information is published
through press releases, publications, and audits and on the Internet. The presence of
watchdog nongovernmental organizations (NGOs) strengthens horizontal accountability.
1.34 A central issue in the management of large resource revenue flows,
whether through a separate fund or not, is that of transparency. The public at large is
likely to be aware that the government receives large amounts of revenue, and there is a
corresponding expectation that they will benefit from it. Transparency concerning the oil
fund is often connected to and reinforces attitudes toward a wider transparency
concerning a country’s oil sector. Some oil funds, from their inception, have been
established in an environment where published information on total oil revenue flows to
the government is an integral part of the budget process, but in other cases, total oil
revenues are not transparent. One way to provide such information is through the
Extractive Industries Transparency Initiative (www.eitransparency.org.), in which
governments, companies, and civil society form a voluntary partnership to collect and
publish information about all resource revenues made to and received by the government.
It may also be valuable to ensure that basic information is made available to the widest
possible part of the population through information campaigns that provide a simple
account of the revenues to be received and their planned use by the government.
1.35 Certain countries have taken a paternalistic approach and deliberately
concealed information about resource revenue flows, and the size and performance of
their oil funds, to avoid popular demands for increased current spending that the
authorities may feel is unjustified in terms of longer-term strategic interest. However, this
approach runs the risk of concealing self-interested behavior by policy makers and poor
fund performance.
2
The Alberta Heritage Savings Trust Fund (AHSTF)2
Overview
2.1 Some two-thirds of the land in Alberta is government owned “Crown
land,” and 80 percent of the province’s oil and gas production occurs on Crown land
(Warrack and Keddie 2002), which has resulted in the provincial government receiving
an important source of revenue from royalties on the production of oil and gas (the
federal government receives corporate taxes). As oil production increased, so did the
importance of this royalty income. The ratio of oil and gas sales to provincial gross
domestic product (GDP) climbed steadily, from 14 percent in 1961 to 23 percent in 1973,
just before the first oil shock. However, government receipts from other sources
increased even faster, so that by 1973, the share of revenue from royalty receipts had
fallen from 38 percent in 1961 to 20 percent (Roger S. Smith 1992).
2.2 During this period, the abundance of taxation from oil and other natural
resources allowed the provincial government to reduce taxes on items such as gasoline
and personal income, so that households were implicitly receiving part of the resource
rents and were able to make their own savings versus consumption decisions on this extra
disposable income. An incident that foreshadows later experience in Alaska, and the
current debate on the use of oil revenues in countries such as Iraq, occurred in the 1950s,
when the government, prior to an election, issued an oil dividend of Can$25 to every
adult in the province.
2.3 The very large increase in the world oil price of 1973–74 coupled with
increasing production led, as in Alaska, to a sharp increase in the importance of the oil
sector—in 1975, the ratio of the sales of oil to GDP reached 29 percent, and royalties
accounted for 41 percent of total government receipts. In late 1974, a savings fund was
proposed and, following vigorous debate during the 1975 election, the AHSTF was
established by an act of parliament in 1976.
2.4 Before the creation of this fund, there had been no explicit policy with
respect to the use of oil revenues, but government spending had largely focused on social
and economic development. Premier Peter Loughheed articulated the new focus of the
2
Official information on the AHSTF is taken from www.finance.gov.ab.ca/business/ahstf/.
17
18 Experiences with Oil Funds: Institutional and Financial Aspects
fund (Mumey and Ostermann 1990): “Are we prepared as a province to put aside
substantial sums of current revenues from the sale of non-replaceable crude oil
production, put it aside for our children and for our grandchildren and not make it
available for current revenue needs; to use it for that day…when some of the wells may
have gone dry?” There were to be four objectives:
1. …a future source of revenue, either through the income flowing from the
fund or from the fund itself, as resource revenue declines in the years and
decades ahead;
2. …to reduce the debt load that may at some future time, perhaps not too far
away, be required by the citizens of this province for capital projects of a
budgetary nature;
3. …to improve the quality of life in this province, to do some special things
that no other province is able to do, so the quality of life here becomes
even better and certainly compares well with other parts of Canada;
4. …to strengthen and diversify the economy of the province…. It is fairly
clear to forecast that for Alberta in the mid 1980s, oil and gas as both a
source of revenue and as a job-creating part of our economy in a
conventional sense will have passed its peak.
2.5 These distinct aims were to be met by creating separate divisions within
the fund’s operational structure, each with distinct goals and responsibilities. There was
no mandate to maintain financial capital in either real (via inflation proofing) or even
nominal terms, because expenditures could draw down capital as well as income. The
fund was set up with an initial endowment of Can$1.5 billion, plus 30 percent of royalty
income, and all yields from the fund’s investments. However, in 1983, the yields from
the fund were diverted to the general budget of the province, and for the period 1984–87,
only 15 percent of royalties were added to the fund while yields were remitted to the
General Revenue Fund (GRF). From 1987 onwards, there were no further resource
inflows into the fund, and yields went back to the general budget. The decreased resource
flow into the fund reflected the increasing spending needs of the government together
with the effects of slowly declining oil production and lower oil prices in the mid-1980s.
Reflecting these changes, which were brought about by increasing budgetary demands,
the fund reached its peak value of Can$12.7 billion in 1987 and has declined slightly in
nominal terms and substantially in real terms since then (a historical summary of flows
into and out of the AHSTF is given in table 2.5).
2.6 By the mid-1990s, the province’s net debt was well on the way to being
eliminated, and as a result of this, and also of increasing questioning of the effectiveness
of the spending policies made by the fund itself, a wide-ranging review of the fund’s
objectives and operations was undertaken, starting with a survey of public opinion in
1995. There was overwhelming support for retaining the fund (rather than dissolving it
with an effective payout to current citizens) but for changing it into purely an ordinary
financial investment fund whose goal was to maximize return subject to acceptable risk.
In 1996, a new act was passed, which restructured it into two separate portfolios. A
transition portfolio was to hold all the old “heritage” assets, and an endowment portfolio
The Alberta Heritage Savings Trust Fund (AHSTF) 19
was to hold the long-term investment in all forms of assets. The transition portfolio was
to transfer at least 10 percent of its assets each year to the endowment portfolio until it
had evaporated completely. Sufficient income was to be held in the fund to cover its costs
and for inflation proofing, but the rest was to be transferred to the government budget.
Inflation proofing was achieved by ad hoc retention of some yields of the fund in 1996–
97, 1997–98, and 1999–2000, and after 2000, this would become an automatic feature
once government debt was paid off. The investment aims of both portfolios were purely
commercial, and so the earlier goals of economic diversification and social improvement
were abolished. Interestingly, the new act still maintained the flexibility to pay oil
revenues into the fund from the GRF, using a special act, but to date, this provision has
not been used.
2.7 By November 2005, the series of budget surpluses run by the government
during the previous decade had led to the complete retirement of public debt. The
government announced that Can$226 million would be paid to the AHSTF to ensure its
inflation proofing for the year. In addition, the treasury would pay every resident of
Alberta a rebate of Can$400. This was to be paid directly from government revenues,
rather than indirectly from the dividends or capital of the oil fund.
2.8 Hence, the AHSTF has evolved in two striking ways. First, its claim on oil
and gas revenues, initially from their flows and from the yields on their investment by the
fund, has been steadily reduced, until the present day when (a) no new transfers into the
fund are made, (b) it is managed to maximize income, and (c) all of this income (less that
for inflation proofing) is returned to the government budget. Second, the investment
strategy of the fund itself has been changed from one in which it could support industrial
diversification and social projects, as well as purely financial investments, to one in
which only financial investments are carried out. These changes reflect the flexibility of
arrangements with which the fund was set up and the relative ease with which changes in
these policy parameters could be made.
2.9 In effect, the AHSTF has been de facto completely decoupled from the oil
economy and is now purely a portfolio of financial assets, whose returns are being used
largely to pay down provincial debt. However, the eradication of the province’s debt and
the rapid increase in royalties, from higher oil prices and from any increased production
encouraged by these prices, is providing a new stimulus to Alberta to consider not only
the future role of the existing fund, but also how to use the next generation of oil
revenues.
2.10 From its inception in 1976 until 2005, the AHSTF has received Can$12.0
billion from the GRF as its share of royalties, and it has earned (net of costs) Can$26.9
billion. Of this, Can$27.6 billion have been transferred back to the GRF, of which
Can$3.5 billion was spent on capital projects, leaving the fund’s portfolio at Can$11.4
billion (at cost). The detailed flows shown in table 2.5 show that one of the important
effects of the fund was to transfer revenues and interest earned in the 1970s and early
1980s to government expenditures spread out from the mid-1980s to the present.
20 Experiences with Oil Funds: Institutional and Financial Aspects
“Can We Interest You in an $11 Billion Decision?” to which there were more than
50,000 replies. The responses emphasized retaining the fund but focusing it on generating
better returns on longer-term investments. As a result, the AHSTF Act was amended in
1996 to reflect these opinions, and the fund itself was restructured in 1997 (the revised
version of the act is given in appendix 1B). A further survey in 1998, “Talk It Up. Talk It
Out,” asked about fiscal priorities, including increasing savings in the fund, reducing
provincial debt, reducing taxes, and increasing spending. Of these, increasing the savings
in the fund as first priority attracted support of only 19 percent of the responses. A further
survey in 2000, “It’s Your Money,” confirmed these priorities. In 2002, a commission
reported on Alberta’s fiscal framework (“Moving from Good to Great—Enhancing
Alberta’s Fiscal Framework”) and made a number of recommendations that included
allowing the AHSTF to grow through further transfers into the fund, and that the fund be
partially used for stabilization purposes. These proposals have not been accepted. Yet
another survey (“Looking Forward: Planning for the Future with the Alberta Heritage
Savings Trust Fund”) was carried out by the government in 2003, in which some 77,000
Albertans replied to questions asking specifically about the purposes of the fund itself.
The priority was to maintain the fund at its existing level and use the earnings to support
the budget. However, the fact that all debt has now been retired, and that oil revenues are
increasing sharply, is likely to reopen questions about the long-term strategy for using
these revenues and whether the fund should start to receive a share of them to increase its
benefits for future generations.
return of this division averaged about 2 percent, as opposed to 10 percent achieved by the
commercial division. The control and management of this division was exercised by the
investment committee of the executive council (cabinet).
2.23 The CID made loans to other provincial governments at preferential rates,
because Alberta had the lowest risk of any Canadian government entity. However, these
loans were made at a time when interest rates were high, thus they were financially
successful. No new loans were made after 1982, and all such loans were due to be repaid
by 2005. This division was initially constrained to account for 15 percent of the fund at a
maximum. Management of this division was under the control of the investment
committee of the executive council.
2.24 The CPD invested in parks, hospitals, and other nonfinancial return
investments (Alberta Heritage Foundation for Medical Research, Alberta Heritage
Scholarship Fund, Reforestation Nursery Enhancement Program, Alberta Oil Sands
Technology and Research Authority). No cost-benefit analysis was carried out for these
projects, which could account for up to 20 percent of the fund. These were kept on the
books of the fund as “deemed” assets despite their lack of return (contrary to
recommendations of the government auditor). Spending on such projects ceased in 1995.
Management of this division’s investment was under the control of the executive council.
2.25 In 1980, the Commercial Investment Division was established to invest in
Canadian stocks and money markets, but this accounted for only a small part of the fund
until the restructuring in 1997, when the whole fund was organized so as to optimize
financial returns. Current assets were under the management and control of the provincial
treasurer.
2.26 Also in 1980, the EID was established to invest in debt or equity that
would facilitate further development of Canada’s energy sector. This was inconsequential
in size and was curtailed after the start of a national energy program.
2.27 In 1997, the investment policy of the fund was changed completely to
maximize returns subject to the “prudent investor rule” (that is, to restrict itself to
investments that would be made by a prudent person). According to the act, it was “to
provide prudent stewardship of the savings from Alberta’s non-renewable resources by
providing the greatest financial returns on those savings for current and future
generations.” The portfolio was initially split into two parts—the transition portfolio that
was to be managed to support the province’s immediate fiscal needs and the endowment
portfolio that was to optimize long-term returns. Over time, assets would be transferred
from the transition fund to the endowment fund, and in fact, the transition portfolio was
wound up in 2002, when all its assets had been transferred to the endowment portfolio.
The aim was that in the long run, 60 percent of the endowment fund would consist of
equities, of which half would be non-Canadian. There were thus no restrictions on the
classes of assets that could be held, so that both Canadian and non-Canadian equities and
bonds could be held as well as real estate. A benchmark portfolio was established, which
on historical grounds could be expected to achieve a 5 percent real rate of return, and it
was expected that active management would add 0.5 percent above the benchmark.
24 Experiences with Oil Funds: Institutional and Financial Aspects
2.28 External managers were hired to cover specific investment mandates, and
following the restructuring of the AHSTF, the annual business plans, which are required
to be published, formulated a numbers of goals, which could be changed if circumstances
warranted. For example, the business plan for 2004–07, reviewed and approved by the
Treasury Board in January 2004, and by the legislature’s Standing Committee on the
AHSTF in February 2004, articulated the following goals:
• Maintain the nominal value of assets at a 5-year planning horizon,
• Achieve budgeted cumulative income forecasts during a 5-year planning
horizon,
• Preserve the real value of assets over a 20-year horizon.
2.29 These were to be achieved through:
• Increasing investment in absolute return strategies and private equity,
• Reducing Canadian fixed income investments,
• Reducing public equity investments,
• Rebalancing the assets portfolio mix within guidelines set by Alberta
investment management’s guidelines,
• Reducing investment in project loans,
• Retaining, as affordable, sufficient income to ensure that the AHSTF
grows with inflation.
2.30 This asset portfolio mix was then expected to generate a total real rate of
return of 4.5 percent at an acceptable level of risk over a five-year period, and to be 0.5
percent higher (after deduction of fees) than a passively invested benchmark portfolio.
Specific shares in the portfolio of each asset class and the benchmark index for these
classes are published in the annual reports.
2.31 From 2000, the annual reports and auditor’s report on the AHSTF have
been published on the Internet, which allows an assessment of the composition and
performance of the fund, both in total and by asset class. It does not provide separate
details of the external fund managers and their performance, except for the percentage of
the portfolio they manage.
assembly, had as its duty to review the annual reports of the fund and make
recommendations to the government. The act for transferring monies be authorized only
when the Select Standing Committee’s report had been received. This gave a delaying or
veto power to the committee on increasing the size of the fund, but could not directly
control investment policy decisions. The political composition of the committee reflected
that of the parliament, thus it is not surprising that the committee did not generally make
recommendations that were contrary to the government’s views. On occasion there have
been minority reports, but the government did not have to act according to the
recommendations of the committee or respond to them.
2.33 With respect to the governance of the fund’s investment decisions, the
initial act treated the different investment divisions distinctly. For projects put forward by
the CPD, the procedure was the same as for other government expenditures. Estimates of
expenditures were introduced in parliament and a full debate by the Committee of Supply
was followed by the passage in the house of an appropriation bill. This ex ante control
could apply to at most 20 percent of the fund’s assets (the maximum allowed under the
act for capital projects). Projects under the AID or the CID had to be made in accordance
with the directions contained in any resolution of the legislative assembly, but this
provision was scarcely used. The cabinet had a subcommittee, the AHSTF Investment
Committee, which determined the investments by these divisions without prior legislative
debate or approval, but which could seek investment advice from outside. It is the
performance of these investments that is subject to ex post review by the Select Standing
Committee of the house. The residual pool of current assets was placed under the
management of the provincial treasurer and his staff. These arrangements were the
subject of intense debate at the time of setting up the fund. The Conservative Party of the
time saw the role of the government as that of an entrepreneur, and argued that its
investment intentions could not be divulged ahead of time because this would place it at a
competitive disadvantage. Hence, decisions were left to the executive, with weak
oversight by the legislature after the event. This set of arrangements is summarized in
table 2.1.
2.34 The revised act of 1996 reviewed the governance provisions of the now
single-goal fund. The provincial treasurer3 was given authority “...to hold, manage,
invest and dispose of the assets of the Fund….” The treasurer has to report quarterly on
the performance of the fund, within 60 days of the end of the quarter, and make public
the annual report within 90 days of the end of the fiscal year. The treasurer is also
responsible for the preparation of a three-year business plan published as part of the
annual provincial budget.
3
The government of Alberta made a series of changes to its organization that determined who had
oversight and control of the AHSTF. In 2001, the treasury was split into revenue and finance divisions
with separate ministers, and the minister of revenue had responsibility for the AHSTF; in 2004, these were
recombined into the ministry of finance headed by the finance minister, who then took over responsibility.
26 Experiences with Oil Funds: Institutional and Financial Aspects
2.35 The revised act established the Standing Committee on the Alberta
Heritage Savings Trust Fund, which comprised nine members of the legislative assembly
appointed at the beginning of each session in the same way that members of other
standing committees are appointed. Three of these could not be members of the ruling
party, unless nobody in this category is willing to serve. The statutory functions of the
standing committee are to:
• Review and approve annually the business plan for the AHSTF,
• Receive and review quarterly reports on the operation and results of the
operation of the AHSTF,
• Approve the fund’s annual report,
• Review after each fiscal year the performance of the AHSTF and report to
the legislature whether the fund’s mission is being fulfilled and hold
public meetings with Albertans on the investment activities and results of
the fund.
2.36 Each year, the treasurer prepares a business plan for the operation of the
fund, which first has to be approved by the treasury board, consisting of the minister of
finance and at least four other elected members appointed by the lieutenant governor in
council, before being submitted to the standing committee for its approval, after which it
is incorporated into the annual budget plan for consideration by the legislative assembly.
2.37 In 2003, further formal oversight provisions were introduced by the
creation of the endowment fund policy committee, which provides advice to the treasurer
on the investment policies of the fund. This committee reviews and makes
recommendations with respect to the business plan, annual report, and investment policy
statements for the fund. External members of this committee provide financial and
business expertise. The committee meets at least quarterly to review fund performance
and provide general oversight.
2.38 In addition, the investment operations committee, chaired by the deputy
minister of revenue and including private sector representatives (nominated by the
minister of revenue), is charged with the responsibility of providing oversight of the
actual management of the fund (by Alberta Revenue’s investment management division)
and of investment performance at the subfund level.
2.39 The new organization and administration arrangements are summarized in
table 2.2.
2.40 Since the fund’s inception, auditing has been provided by the auditor
general, but in terms of providing a check on overall policies, this sometimes proved to
be of limited value, as reflected in the debate over the treatment of the investments of the
CPD. These investments were not expected to provide a financial return (for example,
parks) but were recorded as “deemed” assets in the balance sheets. The auditor general
and the standing committee on the AHSTF both consistently recommended that they
should be excluded from the statement of the fund’s net worth, and in 1987, the auditor
general explicitly dissented, but the practice continued until the nature of the AHSTF was
changed by the 1996 revision.
28 Experiences with Oil Funds: Institutional and Financial Aspects
assets of the AHSTF at this time were entirely Canadian, and this lack of diversification
is in strong contrast to most other funds, which have been largely invested abroad.
Table 2.3: Composition of the AHSTF, March 31, 1988 (current Can$ million)
AID
Alberta Mortgage and Housing Corporation 3,279
Alberta Government Telephones Commission 1,099
Alberta Agricultural Development Corporation 1,017
Alberta Municipal Financing Corporation 825
Alberta Opportunity Company 165
Participation in Syncrude project 509
Alberta Energy common shares 237
Government of Alberta promissory notes 200
Other investments (primarily Ridley Grain and Millar Western Pulp 190
debentures)
Total 7,520
CID
Loans to Atlantic provinces 982
Hydro Quebec 303
Manitoba 185
Total 1,470
Commercial Investment Division
Securities 263
CPD
Loan to Vencap Equities Alberta Ltd. 200
EID 1
Cash and marketable securities
Banker’s acceptances, deposits, notes, and money 1,430
Government of Canada treasury bills 1,014
Government of Alberta promissory notes 353
Total 2,798
Accrued interest and receivable due from the GRF 310
Total financial Investments of the fund 12,562
CPD (deemed assets)
Walter C. McKenzie Health Services Center 388
Alberta Heritage Foundation for Medical Research Endowment 300
Other medical or hospital 199
Irrigation: headworks, main systems improvement, rehabilitation, and 600
improvement 404
Alberta Oil Sands Technology and Research Authority 225
Kananaskis Country Recreation Development 100
Alberta Heritage Scholarship Fund 544
Other deemed assets
Total 2,759
Total financial and deemed assets 15,321
2.43 Following the restructuring of the portfolio in 1997 and the change of its
mandates, with the winding up of loans to Crown corporations and other Canadian
provinces, a more conventional savings fund was created. The annual reports from 2000
to 2005 provide substantial detail on the assets held in each asset class, the performance
30 Experiences with Oil Funds: Institutional and Financial Aspects
of each asset class, and returns compared to the benchmark. All performance measures
are given in Canadian dollars. By 2005, the revised act had been in operation for several
years, and the initial separation of the endowment and transition portfolios terminated
with the winding up of the transition portfolio.
2.44 To achieve a satisfactory long-run performance that balances return and
risk, a benchmark portfolio was determined that indicates for each class of assets the
long-term target weight in the portfolio and an index of returns for each class of assets.
The actual portfolio performance is then measured against the performance of the
benchmark portfolio. Table 2.4 shows the performance of the actual and benchmark
portfolios for 2005. Administrative expenses were 0.169 percent of the fair market value
of the fund in 2005.
Table 2.4: Actual and Benchmark Portfolio Performance of the AHSTF for Year
Ended March 4 (returns measured in Can$)
2005 2005 Five-
actual target 2005 2004 2003 2002 2001 year
Asset (%) (%) return return return return return return
Short-term fixed 0.8 2.3 2.9 3.0 3.8 5.7 3.5
income 32.5 2.2 3.0 2.7 3.7 5.7 3.5
Long-term fixed 31.9 5.5 11.6 9.5 5.9 9.5 8.4
income 5.0 10.8 9.2 5.1 8.7 7.7
Canadian public 18.5 15.0 15.4 36.6 −16.6 4.2 −16.0 2.9
equities 13.9 37.7 −17.6 4.9 −18.6 2.0
U.S. public 16.2 15.0 −1.6 22.1 −30.6 1.4 −14.4 −6.3
equities −1.0 20.5 −30.7 1.6 −15.1 −6.5
Not Applicable (NA).
a. Inflation measured by all items’ CPI for Canada.
Note: Figures in italics are benchmark returns. The separation of the portfolio into endowment and
transition subportfolios in earlier years means that no overall benchmark returns were published.
2.45 During the period 2001–05, the AHSTF was expected to achieve a 4.5
percent real return, and during the five-year period, the rate of inflation was 2.4 percent.
Hence, the required nominal return of 6.9 percent was not achieved by the fund, largely
because world equity markets during that period underperformed historical long-term
average rates of return. The nominal rate of return for this five-year period is similar to
4
The benchmark funds against which performance are measured are short-term fixed interest = Scotia
Capital 91 day treasury bill index; long-term fixed interest = Scotia Capital Universe Bond Index;
Canadian equity investment = Toronto Stock Exchange Standard & Poor (S&P) Composite Index; private
equities = consumer price index (CPI) plus 8 percent; U.S. equities = S&P 1500 Index; non-North
American equities = Morgan Stanley Capital International Index for Europe, Australia and the Far East
(EAFE); CPI plus 5 percent; absolute return strategies = CPI plus 6 percent.
The Alberta Heritage Savings Trust Fund (AHSTF) 31
the return made in the period up to 1990 (4.8 percent net). The value of the portfolio at
cost during the most recent period was kept more or less constant by the rules for
operating the fund (appendix 1), but operating costs steadily increased during the most
recent five-year period.
2.46 The detailed breakdown of the performance of the fund by asset class
reveals some interesting features of performance valued in domestic currency. Even over
a five-year period, the returns from U.S. and EAFE equities were negative, while
Canadian assets returned substantial positive returns. Exchange rate movements have
been an important feature of the performance of the AHSTF, as illustrated by the
experience of 2005. The benchmark equity index rose 7.2 percent in U.S. dollars, but fell
by 1 percent in local currency. For Alberta, where there was a substantial domestic
market for fixed interest and equities, as well as real estate, the decision to invest the
majority of the portfolio locally ensured that the performance of the fund in 2005 was
satisfactory. The performance of domestic and foreign equities was highly variable over
the period, while fixed interest securities delivered a much less variable return.
2.47 The experience of the AHSTF highlights a number of issues:
• Should returns be measured in local currency or a basket of foreign
currencies?
• Should substantial investment in real estate be undertaken?
• Should the portfolio be invested locally, and if so, to what extent?
• Should the portfolio include equities?
2.48 In Alberta, where the income from the fund is returned yearly to the
budget for general use, it is clearly important to consider returns in local currency,
although providing information on the returns in the currency of the assets is also
important in that it allows an assessment of the performance against the benchmark, and
also provides evidence on which class of foreign assets performed best. To reduce the
risk from exchange rate variations and a reliance on equities, more than 60 percent of the
AHSTF was invested locally, of which more than half was in high-grade income
securities. Such a strategy may not be possible in developing countries, where the
markets for bonds and equities may be thin or nonexistent.
2.49 Equities, although they may provide the best returns over the long run, can
be much more volatile than interest-bearing investment, and domestic bonds (mainly
long-term securities) made up about one-third of the AHSTF. Indeed, in the period
considered by this analysis, the return on investment provided by low-risk, interest-
bearing, securities was higher than the average return of the whole portfolio.
2.50 The AHSTF has benefited from real estate investment, but this may be
particular to the case of a highly developed economy experiencing growth and possessing
a large stock of real estate assets. In developing countries, the real estate market may be
extremely volatile, and its assets may be highly illiquid.
32 Experiences with Oil Funds: Institutional and Financial Aspects
Assessment
2.51 The experience of the AHSTF illustrates many of the issues that have been
raised in general discussions of the desirability of establishing oil revenue management
funds, in particular whether the aims of the fund should be distinct and separate from
those of the general budget, how the fund was to be governed, and its relation to the
population of Alberta.
2.52 The initial goals for fiscal policy and the creation of the AHSTF with its
spending priorities corresponded to aspirations exhibited in many oil-producing
countries, both developed and developing:
• Some of the revenue should be saved for future generations against a time
when the oil would run out, and this should be done in a way that is
visible by keeping the money separate in a fund and by managing this
money prudently.
• There should also be spending on diversification to strengthen the
economy for a time when the importance of oil and gas production
declines.
• There should be spending on social projects that would not yield a direct
economic return but would either yield long-term gains (for example,
education) or else would contribute to noneconomic forms of welfare
(parks and so on).
2.53 The latter two goals for the fund are particularly striking because they
cover activities that are conventionally undertaken by the general budget. However, in
the case of Alberta, the governance structure that was set up for these activities (as
opposed to general capital projects) was such that the level of control was different from
and less stringent than what it would have been had this money been left in the general
budget. Indeed, by transferring money to the fund for this loosely defined set of
objectives, the executive (through the cabinet) determined spending priorities in a very
autonomous fashion. This was defended at the time on “business” grounds, under the
need to conceal from potential rivals the nature of the deals the AHSTF would be
making, thereby also concealing from parliament and the public the intentions of the
executive until after decisions had been implemented.
2.54 Although there were ex post considerations of these decisions, which
could have led to refusal by the legislature to approve further transfers into the fund,
these were rather weak and could not easily reverse a spending decision once it had been
made. Moreover, although transactions were subject to scrutiny by the auditor general, no
social or economic cost-benefit analysis was carried out, so the success of these decisions
was difficult to assess.
2.55 Although there had been substantial initial debate about the creation of
such a fund and its goals, once the initial act had been passed, the involvement of the
population at large was rather indirect. Annual accounts were published, but these
initially were in the form of government papers and were rather inaccessible to the
average citizen. Later commentators noted that few people knew much about the fund,
The Alberta Heritage Savings Trust Fund (AHSTF) 33
how it worked and what its resources were. At the same time, much of its spending was
in forms that yielded rather indirect results (for example, loans to Crown corporations),
so its current benefits were somewhat intangible, and the accumulated savings aspect was
not widely publicized. The lack of formal benchmarks against which the fund
performance could be evaluated, as well as the initial limitation of investment to within
Canada, also distinguish its operation from that of other funds during the period before
1997.
2.56 The distancing of the fund from both the legislature and the public made it
possible to gradually shift its nature during the 1980s, when the government’s aggressive
spending policies, coupled with the fall in oil revenues linked to the drop in the world oil
price, necessitated the gradual elimination of transfers into the fund and the withdrawal
of all the proceeds it had earned. In fact, the failure to even inflation-proof the fund at
this time resulted in its decline in value in real terms. Ignoring the social spending
aspects of the fund, and treating this part of its history as an exercise in optimal savings,
it could be argued that the government saved too much early on, and too little later,
leading to the possibility of a rather uneven flow of expenditure. Some of this was in fact
smoothed out by increasing the province’s debt, but then this had to be repaid, putting
pressure on other government spending.
2.57 By the mid-1990s, the government of Alberta was willing to engage the
public in a debate over the future of the fund, reflecting unease over the performance of
the nonfinancial assets and the impact of the democratic process. A series of surveys
resulted in a major formal change in the act and the fund, restricting its role to that of a
savings fund with financial objectives tied to “prudent” investing. Although the
possibility of increasing total savings by making further transfers into the fund was left
open, this has not happened during the past seven years, indicating the higher priority of
paying off the province’s debt. The crucial aspect of the fund that emerged from a series
of decisions is that it no longer reflects changes in the oil price and oil revenues and so
has no stabilization function. Even following the enormous rises in oil prices in 2004, the
general budget of the province benefited but the fund did not. Its contribution to the
province’s finances is presently limited by movements in stock exchange values and by
financial management policies of the portfolio.
2.58 The other major change that was made was to improve the governance of
the fund by introducing a number of checks and balances and improved transparency.
The publication of quarterly and annual reports (now available on the Internet) and a
business plan, together with the need for legislative approval an the establishment of a
formal committee of external advisers on investment policy, have removed control from
the executive. Ironically, the restriction of the fund to a financial investment instrument,
managed by the finance ministry through internal and external investment specialists, has
made relatively little difference in this aspect of the fund’s performance. Previously, the
current assets, which were a substantial part of the fund, were all managed by the
Investment Management Division of Alberta Revenue and appeared to perform well, but
this was without a specific business plan with published goals and targets. The use of
benchmarks to check on progress is one form of control on performance, but control
could be further enhanced by the introduction of some competition between managers of
subfunds with similar goals.
34 Experiences with Oil Funds: Institutional and Financial Aspects
2.59 Several of the possible criticisms of the AHSTF can also be seen as
positive aspects, even though they may be owed to the strong democratic nature of the
province. The ability to change the remit of the fund, to adjust payments into it and the
use of earnings each year, by executive council (cabinet) decision with the sole check
that the previous year’s annual report had been received by the legislature allowed a
flexible response to changing external or internal circumstances. As oil prices first fell,
then later rose, changes in the province’s budgetary strength were reflected in the attitude
to the use of the fund in a way that could not have been achieved if the fund had been
established outside executive control, or by a constitutional instrument that required
major legislation for change. Even the revised act of 1996, which changed the
fundamental objectives of the fund, required only a simple majority in the legislative
assembly.
2.60 There is little direct evidence that the initial goals of the fund to diversify
the economy and improve social infrastructure were very successful. This lack of
evidence comes from the failure of the government to carry out cost-benefit studies, or
even consumer satisfaction surveys, so that although the policies may have achieved their
goals, the evidence was not collected. The responses of the citizens to the surveys of the
1990s on the possible uses of the fund, which showed that the overwhelming support was
for a savings function alone, suggest that there was no public perception that the other
goals had been achieved and were worthwhile. Again, this may have been due to a lack
of information and publicity, but it illustrates the dangers of this approach.
2.61 The investment strategy of the post-1997 fund and its performance
illustrate the differences between operating a resource fund in a highly developed
economy and doing so in a developing economy. The AHSTF experienced solid
performance from its high-grade income securities, all of which were domestic, and from
domestic real estate, while equity performance (measured in domestic currency) from
foreign and domestic markets was highly variable. Developing countries may be able to
avoid the risks associated with equity investment by limiting themselves to longer-term
fixed interest securities, but they are likely to be more vulnerable to foreign exchange
risks because virtually the whole portfolio may need to be held in foreign currency.
Hedging could provide some insurance against exchange rate risks, but this can be
difficult to achieve.
The Alberta Heritage Savings Trust Fund (AHSTF) 35
Overview
3.1. Alaska became the 49th state of the United States in 1959. It was then
very sparsely populated (fewer than 300,000) and had a low per capita income, high
unemployment, and in some respects faced the development issues of low-income
countries that suddenly become oil-rich. At that time, very little oil was being produced.
This altered dramatically with the exploration and development of the Prudhoe Bay lease,
which yielded US$900 million to the state treasury in 1969 through its share of the lease
payments, because most of the land involved belonged to the state. This initial payment
was huge in relation to the then state budget of US$112 million (Warrack and Keddie
2002). Oil production climbed from 160,000 barrels a day in 1969 until it reached 2
million barrels a day in 1998 and then slowly declined, falling to about 1 million barrels a
day in 2004. Currently, the population is 650,000, and oil accounts for about 40 percent
of government revenues.
3.2. The initial oil lease revenue was used for general development projects
approved by the legislature and funded by the treasury, including water systems, schools,
roads, a student loan scheme, and a longevity bonus, as well as projects to cut down trees,
plant barley, and establish dairy farms, which collapsed (Hannesson 2001). The whole of
this sum was quickly spent, and concerns that some of the money had been wasted, and
that future revenues would not last for long, generated an intense debate over the use of
future oil revenues. Public hearings were held, and internationally well-known
economists were invited to give advice. In both 1970 and 1975, bills were introduced into
the state legislature to create a permanent fund, in which part of the oil revenues would
be saved for future generations. These were not passed (the second being vetoed by the
governor) because of a clash with the state constitution that forbade the creation of any
mechanism for earmarking the use of state revenues for specific purposes. Accordingly, a
constitutional amendment was introduced by the governor, and amended by the
legislature, on which all citizens of Alaska were entitled to vote, for the creation of a
permanent fund. This amendment was easily passed (75,588 in favor and 38,518 against).
5
Official information on the APF is taken from www.pfc.org.
37
38 Experiences with Oil Funds: Institutional and Financial Aspects
3.3. The amendment stated that at least 25 percent of all mineral lease rentals,
royalties, royalty sales proceeds, federal mineral-sharing proceeds, and bonuses received
by the state should be placed in a permanent fund, the principal of which should be used
only for those income-producing investments specifically designated by law as eligible
for permanent fund investments. Revenue from severance (production) taxes was not
paid into the fund, so that the fund received about 10 percent of total state revenue from
oil (Peter J. Smith 1991); about 80 percent of the total of Alaska’s fiscal revenues came
from oil at that time. The first revenues were deposited in the APF in 1977, from receipts
related to oil flowing through the trans-Alaska pipeline. This set off four years of debate
about whether the fund should be managed as a public trust or an economic development
bank, and in 1980, the fund was established by legislation as a public trust. In addition,
the legislature increased to 50 percent the share of the designated state revenues that
would be passed to the fund from leases granted after 1979 (taking the fund’s share of all
oil revenues to about 15 percent) and made a special appropriation to it of US$900
million from the general fund.
3.4. The key feature of the trust was that the principal of the fund was to be
invested permanently and could not be spent without a further vote of the people. Fund
income could be spent, decisions on its use being made each year by the legislature. To
manage the assets of the fund, the Alaska Permanent Fund Corporation (APFC) was
established in 1980, and initially investment was restricted to high-grade income
securities. At the same time, the legislature created the Permanent Fund Division
Program (managed by the state treasury) backdated to January 1, 1979, to distribute each
year to eligible Alaskans a portion of the income of the fund as a dividend payment. The
original proposal was to distribute larger sums to those who had been living longer in the
state, but this was struck down as unconstitutional discrimination by the Alaskan
Supreme Court. The final residence test was merely that all residents (including minors)
who had resided for at least the previous 12 months in the state would be given an equal
dividend.
3.5. The APF was set up in two parts: principal and earnings reserve. Oil
revenues are transferred to the principal, and once money is allocated to the principal, it
cannot be removed without a vote by the majority of voters in a statewide plebiscite. All
investment income earned during the year is placed in the earnings reserve. At the end of
the fiscal year, decisions are made by the legislature on the use to which the earnings
reserve is to be put. The earnings reserve has been used to transfer money back to the
principal, to provide for inflation-proofing (since 1982), and to the dividend account of
the treasury, from whence payments to all citizens are made. Withdrawals for general
government spending can also be made, but this has not yet happened. The balance is
either paid back into the principal (as in 1986) or retained in the earnings reserve to allow
some smoothing of future dividends in years when the income of the fund is lower
because of variations in stock market performance. Formulae for inflation-proofing and
for the sum paid into the dividend account are specified by a legislative act.
3.6. The APFC is a public corporation and is guided in its investment decisions
by an independent board of trustees composed of six members appointed by the
governor. Two must be heads of departments of the state government (one of whom is the
commissioner of revenue); the other four must be members of the public who do not hold
The Alaska Permanent Fund (APF) 39
any state office, who must have recognized competence in finance, investment, or other
business management–related activities.
3.7. The APFC has to manage the investments of the APF according to the
“prudent investor” rule, but the means to do so have evolved. Initially, the target for the
trustees was to achieve a 3 percent real rate of return. Over time, the APFC has been
authorized to invest in a wider range of securities: In 1982, investment in U.S. common
stocks and real estate began, and in 1989, investments in non-U.S. securities were
authorized by the legislature, with investments in emerging markets beginning in 1989.
Alternative investments of up to 5 percent were authorized in 1999, and private equities
and absolute return strategies were added in 2004.
3.8. During this whole period, dividends were paid annually from the fund,
starting with a special dividend paid from the general state budget in 1982 of $1,000 per
eligible person. Since then, dividends have varied between a low of $331 in 1984 and a
high of $1,964 in 2000, which was followed by a substantial decline back to $845 in
2005, reflecting movements in the stock markets in which the APF was invested. It is
important to note that dividends relate to current stock market performance rather than
the current oil prices, although high oil prices will certainly affect the value of the fund
and hence future income and dividends. Dividends, which are paid out just before
Christmas and have become an established and “permanent” feature of Alaskans’ sources
of income; their cessation would be a major blow to lower-income households, so that
suggestions to reduce or abolish these payouts have been fiercely resisted by the voters
(Goldsmith 2002).
3.9. A further source of oil revenues to the state has been from the settlement
of legal disputes with oil companies, of which some 60 cases have earned more than $6.8
billion in direct payments (Tsalik 2003). Since 1990, these payments have been placed in
a separate Constitutional Budget Reserve Fund (CBRF), which is used to help balance
the budget. Loans, which are interest free, from the CBRF to the budget need the
approval of three-quarters of the legislature. If there is a budget surplus, it must be
transferred back to the CBRF. However, because of state spending policies, the CBRF
has been largely depleted, and most disputes with the companies have been settled, so
that this is unlikely to provide a future source of revenue for the budget. The liquidity
required by such a fund necessitates short-term investment policies and lower returns
than earned by the APF, and the capital of the fund can be depleted by action of the
legislature. Some critics have even argued that these monies should also have been
transferred to the APF, placing even more stress on the budget.
3.10. The capital of the APF, receiving 50 percent of certain oil payments, some
of the income of the fund, and some special appropriations, and being inflation-proofed
almost since its inception, has grown very rapidly and was worth $30 billion in June
2005. At the same time, the “lock box” strategy adopted by Alaska, during a period when
its population almost doubled and demands for public spending increased, while there
was no state income tax and there were low excise taxes on fuel, started to generate fiscal
deficits in the 1990s. Following a statewide debate, there was an advisory vote in
September 1999 in which, with a 95 percent voter turnout, some 83 percent of these
voted against a suggestion to use the earnings of the fund to balance the budget. After
40 Experiences with Oil Funds: Institutional and Financial Aspects
further state deficits ($400 million in 2002), lawmakers have debated possible solutions
to this dilemma, and in 2004, legislation was filed in the Alaska Fair Share Bill to
increase the payments of the oil companies to the state. A particular point of focus was
the economic limit factor, which gives lower tax rates on wells producing lower amounts.
As fields mature and decline, the average tax payment per barrel is declining. From an
average production tax rate of 13.5 percent in 1993 to 7.5 percent currently, the rate is
predicted to fall as low as 4 percent by 2013 if no change is made to the legislation
(Hartzok 2004).
3.11. Currently, the trustees are proposing an alteration to the way in which
earnings from the fund, which define the dividend payout, are calculated. Unrealized
gains are counted as part of the principal and so cannot be spent, but once the gains are
realized from the sale of assets, all of these are available for appropriation by the
legislature, being deemed to be income and paid into the earnings reserve account. When
the realized gain is very large, this results in a high proportion of the fund being
“unprotected.” The alternative is based on a percentage of market value (POMV)
approach in which total withdrawals from the fund are limited to a maximum of 5 percent
of market value averaged over five years.6
3.12. Up to June 2004, the fund had reserved assets (principal) of $26.5 billion,
which has come from dedicated mineral revenues (mainly oil) of $8.1 billion, special
legislative appropriations from the fund’s unreserved assets (earnings reserve) of $4.1
billion, the state’s general fund of $2.7 billion, and $8.4 billion from the earnings reserve
fund for inflation-proofing, as well as unrealized gains or losses. Unreserved assets in the
earnings reserve were $859 million in June 2004. Total dividends paid out since 1982
amount to $13.1 billion.
3.13. The APF has remained remarkably constant in both its purpose and
operation—indeed, the main thrust of public opinion has been to reinforce its sole
effective purpose of paying out dividends to every citizen. This has come to be seen as an
entitlement, thus efforts to broaden the purposes to which the fund income (or capital)
may be put have been constantly defeated. Other changes reflect the investment policy of
the fund and allow it, by broadening the class of assets that may be acquired, to obtain
even higher returns with the hope of higher dividends. Changes in governance have been
made, but these are minor, and in any case, the public hostility to the legislature changing
the practice of using income only for present or future dividends has reduced the active
area of governance to that of following good financial investment strategies. In 2004, an
amendment was introduced that the governor could remove a member of the APFC board
only with a letter indicating cause, in contrast to the previous situation where cause did
not have to be shown.
6
Permanent Fund 101.www.apfc.org.
The Alaska Permanent Fund (APF) 41
to legislation have been introduced, not all successfully, and there have been two periods
of intense consultation before changes to the law were attempted.
3.15. In the initial constitution of Alaska, delegates enacted article VIII, section
2: “The legislature shall provide for the utilization, development, and conservation of all
natural resources belonging to the State, including land and waters, for the maximum
benefit of its people.” In addition, the constitution forbade the dedication of state
revenues to any spending theme. These two themes were shown to be possibly
inconsistent by the experience following the signing of the Prudhoe Bay lease in 1969,
which netted $900 million for the state from the sale of the leases (Kasson 1993). The
spending of this very large and sudden state revenue provoked debate on what spending
pattern would be for the benefit of the people, especially in the future. In particular,
Robert Krantz of Kidder Peabody, at the 10th Annual Convention of the Alaska State
Chamber of Commerce in 1969, called for the establishment of a permanent fund, whose
income would be available for appropriation by the legislature.
3.16. The history of the efforts of the next few years, in which there were
several attempts to set up some form of oil revenue fund, has to be seen in the context of
the Alaskan political system. The state has both a house of representatives and a senate,
so that any bill has to be approved by both. Also, the governor has the ability to veto
bills. In addition, there are provisions for constitutional changes by virtue of a
referendum of all eligible voters. The first attempt to introduce a bill creating an oil fund
was made in 1970, when Governor Keith Miller introduced legislation to create a
permanent resource fund. This was passed in the senate, but died in the house. One of the
issues that this first attempt highlighted was the issue of dedication—Governor Miller’s
bill allowed the legislature to appropriate money to the fund as it deemed necessary. The
next five years saw the state gradually increase annual budgets and incur debt based on
expectations of future revenues from the oil fields.
3.17. In 1975, the legislature passed a bill to establish the Alaska Mineral Lease
Bonus Permanent Fund, whose purpose was expressed: “The Legislature finds and
declares that it is essential to preserve a portion of the revenue derived from mineral lease
bonus sales, a nonrenewable resource, for future generations of Alaskans, and further,
that this purpose best can be served by preserving this income in a permanent fund to be
used for investment capital by Alaska residents.” The bill dedicated 50 percent of
bonuses to the fund, whose principal was to be invested as with other state surplus funds.
The income could be reinvested or appropriated for operating or capital expenses of the
government as provided by law. Although this legislation created a permanent fund and
limited expenditures from it to income earned, the bill was vetoed by Governor Jay
Hammond. The purpose of the governor’s veto was not to oppose the principle of the
fund, but rather its establishment and dedication of revenues by a bill. The governor
argued that this required a constitutional amendment instead. Accordingly, in 1976, the
governor introduced such an amendment to the legislature, who made some further
amendments and then placed a version before voters at the 1976 election. The
amendment read:
42 Experiences with Oil Funds: Institutional and Financial Aspects
percent of the designated revenues. On appeal, the clause on the dividend-sharing rule
was struck down as unconstitutional by the Alaskan Supreme Court because it did not
treat all citizens equally.
3.21. In 1982, the legislature introduced an alternative dividend plan that gave
equal payments to all those who had been resident in the state for the previous 12
months. The first payment was to be $1,000, and subsequent annual payments were to be
based on the annual earnings of the fund. A second important piece of legislation was
introduced at the request of the trustees, which enacted inflation-proofing to protect the
principal of the fund and broadened the list of permissible investments to include U.S.
common stocks and equity real estate.
3.22. The drop in oil revenues and the rise in budgetary spending during the
1990s produced further consideration of how the fund should operate. In 1995, a
nonpartisan, legislatively sponsored committee reviewed the state’s fiscal picture and
suggested that there should be a cap on dividends to citizens, but no action was taken.
Further growth in fund income and declining oil revenues led to the establishment of the
Principles and Interests Project in 1997. This culminated in a two-day workshop, town
hall meetings across the state (80 meetings in 41 settlements), and a statewide call-in
during 1998. These focused on the future of the income from the fund (especially the
dividend program) and the capital. The papers from the workshop were then published by
the APC trustees (Alaska Permanent Fund Corporation 1993a). The culmination of this
activity was a statewide advisory vote on whether the earnings from the fund could be
used to balance the budget, to which 83 percent of the 90 percent voter turnout were
opposed, demonstrating the importance of the dividend as seen by those receiving it.
3.23. Despite further fiscal pressures brought about by increased demand for
spending, the fund continued as before. However, complete and mandatory inflation-
proofing of the fund, in a way that was less conservative than the previous model, was
then proposed by the trustees. This was to be achieved through applying a formula based
on the POMV that is the limit to what can be safely paid out each year. Currently, the
proposal is that appropriations from the earnings reserve account would be limited to 5
percent of market value averaged over the previous five years (similar to that for several
other public endowment funds), the rest being retained in the earnings reserve for
inflation-proofing. This appropriation is currently greater than the legislation requires for
transfer to the dividend account so it would be available for transfer to the general fund to
help with the budgetary position. Calculations in 2004 indicated that something in the
range of $175–$300 million could be transferred to the budget this way (Alaska
Permanent Fund Corporation 1993b). The size of these figures indicates just how much
the previous rules had overprovided for inflation. This proposed constitutional
amendment has not yet been put to voters.
3.24. The fund is covered by the original constitutional amendment, cited
above, and by the law on the APF that is given in full in appendix 2, plus some other
amending legislation.
3.25. The principal provisions of the law have already been explained, and
sections of the law cover:
44 Experiences with Oil Funds: Institutional and Financial Aspects
• Payments into the fund from revenues and special appropriations and
management of the fund by the APFC;
• The goal of fund to maximize revenue and act as a savings fund while
maintaining safety of the principal;
• Establishment of APFC and its board of trustees (number, qualification,
and appointment of trustees by the governor);
• Term of office for four years, staggered for the four public members and
removal of Trustees;
• Quorum and voting of the board and compensation, staff of the APFC, and
conflict of interest provision for the board and staff;
• Application of the prudent investor rule by the board and general
conditions on investments that may be obtained;
• Definition of net income of the fund to include income from the earnings
reserve account, definition of income available for distribution;
• Disposition of income via transfer from the earnings reserve account to the
dividend account according to formula; transfer to principal an amount
determined by the formula for inflation-proofing;
• Provisions for audits and reports.
3.26. There is also state law pertaining to the permanent fund dividend. This
covers:
• Eligibility criteria for receipt of an annual payment,
• The process of application for the dividend and proof of eligibility,
• The formula determining amount of the dividend,
• Establishment of the dividend fund within the treasury and duties of the
dividend fund division.
payments due from the 50 percent of oil revenues are transferred monthly from the
treasury to the APF, from where they can be invested. The legislature can also make
special appropriations from the budget to be paid into the APF to add to the principal of
that fund.
3.29. At the end of the financial year, the income available for distribution is
calculated from the earnings reserve account (excluding unrealized gains and losses). It is
set at 21 percent of the net income of the fund over the previous five years (including the
current year), but may not exceed the income of the fund for the fiscal year just ended
plus the balance in the earnings reserve account. At this stage, 50 percent of the income
available for distribution is transferred to the dividend account of the treasury, which
distributes the dividend to citizens as explained below.
3.30. From the earnings reserve account, a sum sufficient to offset the impact of
inflation on the principal of the APF is then transferred back to the APF. This inflation-
proofing sum is calculated by computing the percentage change in the U.S. CPI between
the two previous calendar years and applying this to the value of the APF on the last day
of the current financial year.
3.31. The legislature can then decide whether to return the remaining balance of
the earnings reserve account to the APF, maintain it in the earnings reserve account as a
cushion against future low incomes from the assets of the APF, or transfer it to the
budget. This system to date has effectively had only one outflow, the amount distributed
to dividends.
3.32. For the last few years, the trustees have advised that the rules on payments
out of the earnings reserve account be altered. They have argued that the present rules
allow the available income of the earnings reserve account to be transferred to the
budget, and in certain circumstances, this could result in a large withdrawal from the
value of the fund. This is because all realized capital gains are treated as income and
placed in the earnings reserve account in the year that they occur. The trustees’
recommendation is to limit the total of all payments out of the fund to 5 percent of its
total market value (averaged over a five-year period). Where the difference between this
amount and the sums for inflation-proofing and dividends transfer is positive, then the
balance can be transferred to the budget.
3.33. The formula for the determination of the individual dividends is fully
specified in a separate act. The total available for dividend payments equals the amount
transferred into the dividend account during the current year, plus any unspent balances,
less any obligations to pay dividends from previous years (late applicants and so on), less
costs of administration. This amount is divided by the number of eligible individuals as
defined by law to calculate the individual dividends, which are shown in table 3.3. The
schematic flows in and out of the various funds are shown in figure 3.1.
46 Experiences with Oil Funds: Institutional and Financial Aspects
Opening balance of
the earnings reserve Opening value of the
account APF
Eligible oil revenues
End-year value of
the earnings 50 percent 50 percent
reserve account
Special appropriation
Special appropriation
Dividend
fund of the
treasury
Dividends
Citizens
2000 (in the five-year averages) and because more qualified applicants are expected than
in the previous year.
7
www.media.apfc.org/iceimages/homeobjects/INVMAN.pdf.
48 Experiences with Oil Funds: Institutional and Financial Aspects
as well as a unitized fund of the APF’s short-term and cash assets. The internally
managed fixed income is reviewed by the board. The investment consultant monitors and
evaluates the performance of the internal managers in the same way that external
managers are evaluated.
3.39. External managers are selected after an extensive search process in which
the investment consultant helps in identifying a long list (at least 10) of potential
managers qualified to provide the services needed. A manager search committee then
identifies between 3 and 5 candidates for consideration by the board. All managers are
evaluated quarterly by the investment consultant through written reports to the board,
comparing performance against benchmarks established for the appropriate class of
assets.
3.40. In 2004, the shares of the total portfolio in the classes of approved assets
(target shares in brackets) were:
• U.S. fixed income, 30.7 percent (28 ± 5 percent);
• International fixed income, 4.4 percent (4 ± 2 percent);
• Active managed U.S. stocks, 23 percent; active managed international
stocks, 12 percent; passive managed stocks, 22.1 percent (total stocks, 55
± 5 percent);
• Real estate, 7.8 percent (10 ± 2 percent);
• Private equity, 0.0 percent (2 ± 2 percent);
• Absolute return, 0.0 percent (1 ± 1 percent).
3.41. The benchmarks for the various classes of assets are specified by the
APFC, so that performance of managers and the fund as a whole can be measured against
these external checks. The asset classes are even divided into subclasses, such as large
cap and small cap equities, each with its own benchmark, and a total of 37 managers
were used to cover all the asset classes in 2004, giving opportunities for comparisons
among the asset managers.
8
www.apfc.org/publications/AnRptArch.cfm.
50 Experiences with Oil Funds: Institutional and Financial Aspects
Table 3.2: Actual and Benchmark Portfolio Performance of the APF for Year Ended
June (returns measured in US$)
2004 2004 Five-
2005 actual target 2004 2003 2002 2001 year
Asset return (%) (%) return return return return returna
U.S. fixed 6.8 27 28.0 0.8 10.2 8.0 11.4 NA
income 6.8 0.3 10.4 8.6 11.2
Overseas fixed 10.1 4 4.0 4.3 15.3 10.2 0.8 NA
income 8.8 3.7 12.7 15.7 −7.4
U.S. public 7.2 39 21.1 −0.3 −15.4 −13.1 NA
equities 7.5 55.0 20.5 0.8 −17.2 −14.3
Overseas public 15.4 19 28.4 −5.0 −8.6 −22.9 NA
equities 15.8 32.4 −6.5 −9.5 −23.8
Real estate 27.2 10 10.0 16.5 9.1 10.3 14.8 NA
22.7 13.9 7.0 7.2 14.1
Private equity 0.0 0 2.0 0.0 0.0 0.0 0.0 NA
9
The benchmark indexes are U.S. equities, the Russell 3000 index; international equities, the Morgan
Stanley International Equities Index for EAFE; U.S. fixed interest, the Lehmann Index; real estate, the
National Council of Real State Investment Fiduciaries Classic Index. For international bonds, an amalgam
of indexes is used, but their individual details are not given in the annual reports.
The Alaska Permanent Fund (APF) 51
Table 3.3: Rolling 10-Year Nominal and Real Returns of the APF
(measured in US$)
Period Nominal return Inflation Real return
1985–94 11.6 3.8 7.8
1986–95 10.5 3.6 6.9
1987–96 9.6 3.5 6.1
1988–97 10.6 3.7 6.9
1989–98 11.7 3.5 8.2
1990–99 11.4 3.3 8.1
1991–2000 11.4 3.0 8.4
1992–2001 10.1 2.8 7.3
1993–2002 8.6 2.6 6.0
1994–2003 7.8 2.5 5.3
1995–2004 9.1 2.5 6.6
1996–2005 8.7 2.5 6.2
3.47. Comparisons with the performance of the benchmark portfolio also show
the fund tracking the benchmark extremely closely—in 2005, the fund was 0.1 percent
below the benchmark return, and for the recent 10-year average, the fund return was 0.1
percent above that of the benchmark portfolio. Costs of administration were about 0.16
percent of the value of assets managed.
Assessment
3.48. The Alaskan experience of setting up a dedicated fund to receive part of
the very substantial oil revenues due to the state illustrates two features not presently
found elsewhere. First, as far as is legally possible, the principal of the fund has been
entrenched so that it is not able to be spent short of a constitutional amendment, which
would require a vote of all citizens of the state. Second, the income of the fund is used
solely for inflation-proofing the capital and paying a dividend to the citizens of the state.
Although it is legally possible to transfer some income from the fund to the general
budget, this has not yet happened. The operation of the fund can then be seen to ensure
that the fund’s principal increases with the dedicated share of revenues, and that these are
held constant in real terms. The balance is devoted to whatever citizens decide to spend
their dividend on. Of course, the oil revenues dedicated to the fund can be indirectly
spent if the government runs a deficit and borrows. At present, the total debt of the state
of Alaska is about $8 billion, compared to the fund’s market value of $30 billion. State
debt has been slowly increasing since the mid-1990s, indicating that the net saving of the
state has not increased as fast as the value of the fund.10
10
Data taken from www.census.gov andwww.revenue.state.ak.us/treasury/debtbook/PublicDebtBook2004-
2005.pdf
52 Experiences with Oil Funds: Institutional and Financial Aspects
3.49. The operation of the APF has been successful seen from the perspective of
accumulating resources in a separately managed account, whose income effectively is
earmarked for providing dividends to the population of the state. Not only have
mandatory oil-related payments been accumulated into the fund, but also the state has
itself appropriated to the fund about another 10 percent of its value from the general fund,
as well as returning to the principal another 15 percent of its total value from the earnings
reserve account that could have been used for other purposes. In short, the strategy has
been to accumulate as much as possible from oil revenues into an untouchable reserve.
Hence, although the share of oil revenues payable into the fund has been quite low (at
most about 15 percent), the fund presently has such a large principal that the income
earned from the APF in the late 1990s was larger than total state revenue from oil, which
itself was the largest single source of revenue for the budget.
3.50. The obverse of the success of the Alaska model is that its rigidity, which
protects it from unwise or politically motivated spending decisions by the legislature,
threatens to be a handicap as oil production declines and the state continues to face
budget deficits. The inability to respond to changing state needs is related to the
inviolability of the principal plus the lengthy tradition of distributing earnings in the form
of dividends to all citizens of the state. The direct benefits of the citizens from such a
program, and the effectively “permanent” nature of this arrangement, mean that citizens
have an enormous interest in the operation and use of the fund. They have
overwhelmingly resisted suggestions that some of the income should be used to balance
the budget, thus reducing present or future dividends, and would no doubt equally
strongly resist constitutional amendments that would allow the principal of the fund to be
spent. In short, the Alaska model is set up to work entirely for the benefit of all the
individuals in the state and not to support any form of collective or nonmarket benefit.
Public goods and merit goods are entirely excluded, and the decisions on expenditure are
left entirely to the individual. Remarkably, even though the legislature has the power,
without a constitutional amendment, to transfer part of the income of the fund to support
the general fund, popular resistance to this has so far blocked this option. This raises the
possibility that the state of Alaska, unable to print money, reluctant to increase local
taxes because of public opposition, and constrained on how much debt it can accumulate,
will have to cut social spending. In the long run, the effects of this may force a
reconsideration of the original purpose of the fund, but this correction is likely to be slow
to come into being, as current experience in Alaska has demonstrated.
3.51. The model set up in Alaska has resulted in net public saving, but the only
use to date for these savings is to distribute them directly to individuals, thus
intergenerational transfers are made at a rate dependent on the share of total oil revenues
paid into the fund. Alaskans receiving dividends each year have the option to spend or
save their share of the fund earnings. There has been little formal investigation of
household use of the dividend payments (Goldsmith 2002), so it is not possible to
conclude that households have a pro-consumption bias, or that they treat the dividend as
equivalent to any other form of income and save a similar fraction.
3.52. The APF is very highly structured by law and custom: all tax receipts must
be paid to capital, and no capital may be spent; dividends are based on a formula;
inflation-proofing is based on a formula; and the residual earnings are traditionally
The Alaska Permanent Fund (APF) 53
returned to capital if they become large. Although the legislature could alter the dividend
or inflation-proofing formulae (the latter being currently under consideration through the
use of a POMV approach), this could be politically dangerous and so far has been
resisted. This has in fact left very little discretion on the operation of the fund, and
accordingly there has been little need for governance outside the actual investment
policies of the fund itself. This contrasts strongly with the situation in Alberta, where the
discretion on spending targets meant that governance with respect to performance was
very important, but ex ante information was concealed by the cabinet for the sake of
business confidentiality.
3.53. Since its inception, the APF has exhibited a very considerable degree of
transparency. The APFC has produced annual and quarterly reports for the public, the
legislature, and the governor. It has maintained a Web site, published in newspapers, and
commissioned special papers to discuss the history and problems of the fund.
3.54. The actual management of APF investments has also been tightly
circumscribed by the law, as shown in appendix 2, where the classes of allowable assets
are indicated with great precision. Over time, these classes have been broadened to
permit a very deliberate policy of allowing an increased risk to be balanced by increased
return. The use of performance benchmarks and an elaborate system of investment
advisers and specialists, which is certainly necessary for what is one of the largest funds
in the world, 11 has ensured a performance that matches the benchmarks chosen across a
wide spectrum of asset classes and produced an average long-run real rate of return
around 5 percent.
3.55. One feature of the governance of the APFC, and hence of the APF, is very
striking. The governor has the sole power to appoint and dismiss the APFC board, which
in turn has complete direct control of the investment policy and strategy. The legislature
must approve the APFC annual reports, but their direct power to influence the board
appears limited. The governor’s power over the APF is therefore potentially very great
and, until the recent legal amendment whereby he had to give written cause for dismissal,
could have been used to pack the board to follow investment policies that might have
been unwise. Overuse of Alaskan-based investment managers, or restrictions on investing
in local bonds and equities, could have been used for political rather financial ends. In
other circumstances, the model adopted for control in Alaska could have produced very
poor outcomes for the citizens. However, the requirement that the governor be
democratically elected provides a check on actions the governor might take that would
result in lowering dividends to the citizens.
3.56. The objective of the dividend payout scheme, which is currently unique to
the Alaskan experience with resource funds, was to create an active citizen counterweight
to government in a strongly individualistic society. In this respect, it has indeed worked
well.
11
The fund is among the top 100 investment funds in the world and is larger than any single endowment
fund, private foundation, or union pension trust in the United States.
54 Experiences with Oil Funds: Institutional and Financial Aspects
Overview
4.1 Oil production began in Norway at the beginning of the 1970s. By the time
of the first oil shock, production was only 32,000 barrels a day, but, stimulated by the
impact of both oil shocks, it climbed to about 1 million barrels a day by 1987 and 3
million barrels a day by 1996. Because Norway has a population of only 4.5 million,
domestic demand for oil is limited, making it one of the leading oil export countries.
4.2 Although Norway already had a well-developed economy before the
production of oil, the scale of the discovery was large in relation to the total size of the
economy. Over the last decade, oil and gas have accounted for about 17 percent of GDP
and 40 percent of exports, and oil revenues from the sector accounted for 23 percent of
total government revenue in 2004. In 2004, per capita income was about US$55,000.
4.3 The initial discovery of oil (following earlier skepticism that any oil would
be found) triggered a debate on how to use the revenues without distorting the nature of
the economy and society. In particular, there were widespread fears of Dutch disease
effects whereby increased domestic spending would drive up the exchange rate, making
existing export sectors uncompetitive and creating inflation and unemployment. The
major concern was that the economy would not be able to absorb sudden large injections
of spending (Hannesson 2001). However, there was no debate about how to make the
income from the oil revenues “permanent” through some form of savings fund. In the
early 1980s, the spending of the oil revenues was accompanied by a rise in inflation, an
increase in public sector employment, and an increase in public debt. The sharp fall in oil
prices of 1986 reduced revenues abruptly, so that there was no discussion of a savings
fund at that time. Because the government was also a passive partner in some North Sea
developments, it needed to provide cash to finance its share of investments, and this
resulted in virtually no net cash flow from the sector to other activities during the latter
part of the 1980s.
12
Official information on the NGPF is taken from the Web site of Norges Bank; www.norgest-
bank.no/english/petroleum_fund/reports/.
55
56 Experiences with Oil Funds: Institutional and Financial Aspects
4.4 At this time, an important long-run concern of budgeting was the funding
of the increased pension requirements that the aging population would require (Skancke
2002), and accordingly the government eventually decided to establish a petroleum fund
that would contribute to the goal of accumulating sufficient resources to be able to fund
the increased pension payments. Studies by the ministry of finance indicated a scenario in
which the fund would reach a peak value around 2020 and would then decline, vanishing
around 2040. The NGPF was established by Act 36 of the Storting (parliament) in June
1990. The broad objectives of the fund were to safeguard the long-term use of oil
revenues, manage the government’s net cash flow from oil, and transfer money to the
fiscal budget to cover the nonoil deficit. A report to parliament in 1998 on the future of the
fund also stressed the role of the fund in financing future pension claims, but did not
address a permanent savings objective.
4.5 The operation and use of the petroleum fund in Norway is markedly
different from the cases of Alberta and Alaska, and indeed has a parallel only in the case
of the newly established fund in Timor-Leste. All oil-related revenues are paid into the
NGPF, as are any interest or dividends earned on assets already held, but then the deficit
on the government non-oil budget, determined by parliament, is paid out of the fund
(while surpluses remain in the fund). This means that neither income nor capital of the
fund is safeguarded, because parliament could authorize a budget deficit large enough to
use all current oil revenues and some of the accumulated past revenues. This arrangement
completely addresses fungibility of resources, because transfers into or out of the fund
take place according to the non-oil deficit of the central government, which itself is
determined through normal parliamentary budgetary processes. The central government
debt is small and a stable fraction of GDP (about 19 percent in 2004) and the fund has
already reached a value of 60 percent of GDP, thus its assets correspond approximately to
the net financial position of the central government. This allows a fundamental
transparency principle to be observed: the assets of the fund and their trajectory
correspond to government savings, and people are thus well informed of the net position
of the government through the fund’s highly publicized annual reports, even if they are
less well informed on the magnitude of overall government debt.
4.6 The dominance of the budgetary process over the savings function of an
intergenerational fund was well illustrated in the early 1990s when, although petroleum
revenues were more than 10 percent of total government revenue, no net additions were
made to the fund because of the domestic recession then being experienced, which
decreased non-oil revenues and increased claims for spending. The first net additions to
the fund were made in 1996, and the fund has since accumulated resources steadily, with
on average 75 percent of all petroleum revenues being added to the fund during this nine-
year period. In some years, virtually all the oil revenue has been kept in the fund, unlike in
Alberta and Alaska, where only a fraction was saved. This change in behavior indicates
the strong fiscal discipline exercised by the Storting. Recently, with increasing oil
revenues and a steady increase in the total value of the fund, there have been questions
about the long-term purpose of this accumulation and whether spending should be
encouraged (Listhaug 2004).
The Norwegian Petroleum Fund (NPF) 57
o Gross corruption;
o Other particularly serious violations of fundamental ethical norms.
4.11 The government appointed an advisory council on ethics to advise the
ministry of finance on negative screening and exclusion, and the ministry makes decisions
and informs Norges Bank of its decisions. As a result of these changes, the environmental
fund became redundant, so it was wound up and its assets transferred back into the main
portfolio.
4.12 In January 2006 the government established the Government Pension Fund,
which is comprised of the Government Petroleum Fund and the National Insurance
Scheme Fund. There will continue to be two portfolios, and that corresponding to the
former Petroleum Fund will be known as the “Government Pension Fund – Global.”
Payments into the global portfolio will be equal to the budget surpluses (including oil
revenues) and will be managed and invested as before. The new fund will not assume the
role of a formal pension fund in attempting to match assets to future pension liabilities. It
will, however, provide the government with resources which will contribute to the
management of its future obligations.
• There will be specified limits on asset mix (equities versus fixed interest),
and country limits on the equity portfolio and the fixed interest portfolio.
• There will be a specified interest rate risk limit for high-grade income
securities.
• There will be ethical guidelines for investment.
• There will be a risk control system.
• There will be a specified limit on ownership of equity capital in any single
company.
4.16 One important provision concerns the placement of the fund. The NGPF is
placed in a separate account in the form of Norwegian krone (Nkr) deposits at Norges
Bank. The bank invests this capital separately in its own name in financial instruments and
cash deposits denominated in foreign currency. Although the performance of the fund is
thus calculated in foreign currencies, exchange rate movements could produce major
changes in overall fund value in local currency, which could be important if or when
parliament decides to withdraw substantial amounts from the fund for the purpose of
domestic expenditure. The requirement that all equity and bond investment be abroad
comes from the annual mandates issued by the ministry of finance that specify the
investment universe.
4.17 The management agreement provides broad guidance on the management
structure, reporting responsibilities, and auditing functions to be followed. Detailed
procedures have emerged and been modified over time.
4.18 In terms of the political system, Norway is a parliamentary democracy; the
NGPF is technically an account of the ministry of finance and as such is controlled by the
ministry, as answerable to parliament. Day-to-day decisions are delegated by the ministry
of finance to the central bank, which is responsible for managing the portfolio, subject to a
management agreement between the two institutions. Acts of parliament have been used to
create the fund and state its purposes, as well as place constraints on its operation beyond
the initial purpose of obtaining the maximum revenue for the nation.
Table 4.1: Net Transfers to the NGPF and the Accumulated Fund in Current
Billions of NKr (US$1 = NKr 6.08, Dec 31, 2004)
Share of
Central petroleum
government Net transfers to revenues
Year GDP debt the fund transferred (%) Size of fund
1996 1,026 284 47.5 63 47.8
1997 1,111 276 60.9 71 113.4
1998 1,132 253 32.8 62 171.8
1999 1,233 258 24.4 59 222.4
2000 1,469 285 149.8 94 386.4
2001 1,526 278 251.2 99 613.7
2002 1,519 291 125.3 68 609.0
2003 1,576 339 103.9 64 845.3
2004 1,710 321 138.2 61 1,016.4
Sources: www.norges-bank.no/english/petroleum_fund/reports/ and: www.ssb.no/english/subjects/.
4.23 Table 4.1 presents the net flows retained by the fund since deposits began
in 1996. The shares of total petroleum revenues retained also indicate the magnitude of the
net inflow to the fund. The very high proportion of oil revenues saved since 1996 indicates
that the fund is presently being treated as a savings fund, although the variations in the
proportion of oil revenue being saved do point to a de facto stabilization function as well.
A marked difference from other oil funds has been the very large share of total oil revenue
retained in the fund, which explains why the total size of the fund has increased so rapidly
and, as pointed out in the 2004 annual report, is now equivalent in size to the largest
global pension funds. The fall in the value of the fund in 2002, despite the presence of a
net transfer into the fund, reflects a strong decline in the value of the equity portfolio in
that year.
benchmark was the same as for the equities of the total fund, except for the provision that
specific requirements for environmental reporting or management (as determined by the
ministry of finance) were included and companies in five emerging markets were
excluded.
4.35 In 2003, a further change was made to the constraints on geographical
distribution when the two regions “the Americas” and “Asia and Oceania” were pooled
into one region that was to make up between 40 and 60 percent of the portfolio. At the
same time, the equity benchmark portfolio was changed to allow for both large and
medium-size companies, thus increasing the number of companies covered in the
benchmark. For the first time non-government-guaranteed bonds were added to the
portfolio.
4.36 In 2004, the management mandate of the NGPF was changed again when a
further list of countries was added to the investment universe. Following a report of the
government-appointed Graver Committee and debate on the revised national budget for
2004, the ministry of finance approved new ethical guidelines for the fund’s investments.
An advisory council on ethics was appointed to advise the ministry of finance on negative
screening and exclusion of companies. Because the ethical guidelines included
environmental aspects, the need for a separate environmental sub-portfolio was reduced,
and it was abolished, with assets being transferred back to the other sub-portfolios, in
December 2004. The risk exposure limits stipulated by the petroleum fund regulation are
shown in table 4.2.
Table 4.2: Risk Exposure Limits Stipulated by the Petroleum Fund Regulation
Risk Limits Actual at 31 December 2004
Market risk Maximum 1.5 percentage 0.19
point tracking error
Asset mix High-grade income 50–70 % 59.0
Equities 30–50% 41.0
Market distribution equities Europe 40–60% 49.0
Other 40–60% 51.0
Emerging markets < 5% of equities 3.0
Currency distribution of fixed Europe 45–65% 56.0
income instruments
America 25–45% 34.2
Asia/Oceana 0–20% 9.8
Interest rate risk Modified duration 3–7 5.6
Ownership interest Maximum 3% of a company 2.7
The Norwegian Petroleum Fund (NPF) 65
Table 4.3: Annual Nominal and Real Return Measured in Terms of the Fund’s
Currency Basket 1997–2004 (percent)
1997–
1997 1998 1999 2000 2001 2002 2003 2004 2004
Nominal return
Equities NA 12.86 34.81 −5.82 −14.5 −24.3 22.83 13.00 3.64
9 7
Bonds 9.07 9.31 −0.99 8.41 5.04 9.90 5.26 6.10 6.46
Total return 9.07 9.25 12.44 2.50 −2.47 −4.74 12.59 8.94 5.76
(Total return NKr) 10.83 19.75 13.85 6.53 −5.31 −19.0 19.96 3.93 6.14
9
Excess over 0.23 0.20 1.25 0.20 0.02 0.13 0.47 0.53 0.38
benchmark
Inflation 1.75 0.92 1.28 2.02 1.18 1.89 1.36 2.43 1.60
Real return 7.19 8.25 11.02 0.47 −3.61 −6.51 11.08 6.35 4.09
Costs 0.04 0.06 0.09 0.11 0.07 0.09 0.10 0.11 0.08
Net real return 7.15 8.19 10.93 0.36 −3.68 −6.60 10.98 6.24 4.01
Not Applicable (NA).
4.43 The ultimate purpose of the fund appears to be to support domestic
spending, possibly on pensions, thus the performance of the fund in domestic terms is of
considerable importance. However, for a fund of the size of the NGPF, there is little
alternative to investing abroad because the domestic market would not be able to support
such large financial investments. This contrasts with the case of Alaska, where it was
possible to be heavily invested in the U.S. market without running any exchange rate risk,
but invest outside the state and avoid domestic problems caused by high levels of
expenditure. Over the period considered, the return in domestic currency was similar to
that in the international currency basket, so that the effect of exchange rate movements
over this period was largely neutral.
4.44 In 2004, the NBIM managed 78 percent of the total portfolio, including 57
percent of equities, and accounted for 38 percent of total costs. External managers, who
are more expensive, were allowed to take a more active management approach to their
mandates, but the NBIM is also permitted a certain amount of active management on its
part of the portfolio. The annual reports indicate the extent to which the internal
management was able to improve returns by this means, and this is shown in table 4.4,
which gives the value added through active management, taking into account the
associated costs.
4.45 The extra net return due to active management of the NBIM, compared to
the total net real return on the fund, which averaged 4.09 percent for the whole period, is
substantial. However, if a less sophisticated domestic financial institution were charged
with the management of the fund’s investments, a policy of maintaining the benchmark
portfolio would produce the majority of the benefits to be obtained, without the risks
attached to permitting an inexperienced team to actively manage portfolio selection.
Assessment
4.46 The distinctive feature of the NGPF is that it is, de jure, part of the general
budget process, because the only explicit use of the fund is to support nonoil budget
deficits, and the status of the fund is such that at any time the parliament can withdraw as
much as it wishes from the fund to support the nonoil budget deficit. This flexibility is due
to the fact that there are no rigid accumulation or withdrawal rules. In practice, during its
short operational life since 1996, it has de facto been used largely as a savings fund,
although there have been substantial year-to-year variations in the proportion of oil
revenues saved.
4.47 This contrast between what might be done with the fund, and what has
actually happened, points to the strong discipline of the Storting in not spending the
money on short-term benefits or for political advantage. Such a structure could be
particularly vulnerable to a political election cycle, and over longer periods, this may
prove to be an important factor in the use of the fund.
4.48 The other key feature of the NGPF arrangement is linked to the limitations
on the investment universe—the almost absolute control of the policies for the
management of the fund by the ministry of finance, determined by the foundation act.
Because the single overarching constraint of the fund is to maximize its return subject to a
risk cap, the management focuses on delegation to a competent authority and the
establishment of adequate auditing procedures, which are particularly straightforward for
the classes of assets permitted by the ministry.
4.49 The Norwegian approach to the investment management of the fund was to
make this the primary concern of the central bank and encourage the bank to undertake
much of this itself through the creation of specialized divisions. The bank was already
managing the investment of the petroleum insurance fund and some of the foreign
exchange reserves, initially all held in foreign government bonds, so that the decision in
1999 to allow the NBIM to start to manage some of the equity portfolio itself, and oversee
external managers pursuing an active policy of trying to improve on a benchmark
portfolio, was an important departure. Establishing adequate staffing to take on these new
responsibilities has been an ongoing concern for the central bank.
4.50 The investment universe permitted by the ministry of finance has evolved
in a slow but steady fashion. Initially, only government bonds in a narrow range of
developed country markets were allowed, but this has been widened to permit emerging-
market securities and equities, as well as some non-government fixed interest securities.
More volatile assets, such as real estate, have not yet been permitted. Over its eight-year
lifetime, the performance of the fund does not make an overwhelming case for the
68 Experiences with Oil Funds: Institutional and Financial Aspects
inclusion of equities in the portfolio, and such a decision has to be based on long-term
market performance. A particular difficulty for a fund of this nature, where parliament
may suddenly call for a large withdrawal, is that an equity-dominated portfolio could find
that sufficient funds could be liquidated at short notice only at a loss. Because borrowing
against the fund is not permitted, and increasing debt outside the Fund is not encouraged,
the liquidity of the fund is a factor that should also be borne in mind. This risk is also
compounded by the fact that the whole portfolio is invested abroad, making it vulnerable
to sudden exchange rate movements when a withdrawal for domestic use is required.
4.51 The strategy of defining a benchmark portfolio that could be purchased at
relatively low management cost, against which the more actively managed portfolio can
be assessed, is a very important auditing tool for both the external managers (mandate by
mandate) and the NBIM as a whole.
4.52 For a fund of the size of the NGPF, especially in relation to the size of the
domestic economy, the decision to invest the entire fund abroad is an effective method of
sterilizing the impacts of the oil boom. If there is a need to support domestic investment,
then the non-oil deficit can be increased and transfers to the fund decreased.
4.53 The role of parliament and bodies outside the ministry of finance is also
limited. The Storting does directly control the size of the fund, through its decisions
regarding the non-oil budget deficit, and takes a limited active role in oversight through
the approval of the annual and quarterly reports and the auditor general’s annual report.
The wide publicity given to the performance and management of the fund, through the
widespread publication of the reports, acts as a source of public information, which could
influence the activities of the fund through the democratic process. The 2004 decision to
impose ethical standards on investments illustrates how political considerations may be
superimposed on traditional investment constraints.
4.54 Overall, the operation and management of the NGPF has proved very
successful in accumulating funds for the Norwegian state. It remains to be seen whether
the aggressive saving of oil funds and sophisticated investment policies followed by the
government will be able to accumulate sufficient funds to finance future spending needs at
a time when oil production will be in decline.
5
The State Oil Fund of the Azerbaijan Republic
(SOFAZ)13
Overview
5.1 Azerbaijan has been an oil-producing region since the late 19th century,
and production subsequently grew to substantial levels. However, starting in the mid-
1960s, production gradually declined because of lack of investment when the Soviet
Union directed its attention to other producing regions. By the time of independence and
the creation of the Republic of Azerbaijan, production was about 200,000 barrels a day.
The country was effectively an old oil producer facing the impacts of steadily declining
revenues. The economy at the time of independence, and in the first years thereafter, was
in very poor shape. Government revenues were less than 15 percent of GDP in 1995, and
the deficit was as high as 10 percent of GDP. The resulting monetary expansion drove
down the value of the currency and increased the rate of inflation. Despite the decline of
the oil sector from earlier levels, it was still a major provider of foreign exchange: in the
mid-1990s, oil accounted for 61 percent of total exports, and the large swings in oil
prices hit the balance of payments very hard (as in 1999). Domestically the economy was
weak and suffered from high rates of unemployment—an estimate from the census of
1999 indicates that it was at least 16 percent.
5.2 However, in 1994, the government signed the US$10 billion “deal of the
century” for the development of the Azeri-Chirag-Gunashli (ACG) oil fields, which
produced immediate revenue in the form of signing bonuses in 1995, with oil production
commencing in 1997. Since that time, there has been further investment in oil and gas,
leading to what has been termed a “second oil boom” for Azerbaijan (Bagirov and others
2003, Petersen and Budina 2003). This has resulted in a dramatic turnaround in the
financial and fiscal strength of the economy. Oil revenues accounted for 30 percent of
total government revenue by 2001, and signing bonuses from 1995 onward have been
used to finance a large part of the nonoil deficit, with an average of 62 percent between
1995 and 2000—even by 1999, the share of oil in total exports had risen to 91 percent.
GDP has also increased steadily, and by 2004, per capita GDP was estimated at
US$1,029.
13
Official statistics on the oil fund are taken from http://www.oilfund.az/.
69
70 Experiences with Oil Funds: Institutional and Financial Aspects
5.3 The ACG is making possible a very rapid acceleration in oil output so
that, from a current level of about 300,000 barrels a day, output is now expected to peak
in 2010 at approximately 1.4 million barrels a day, making it about the 15th largest oil
producer in the world, at a level similar to that of Brazil or Libya. However, this very
sharp increase is expected to be immediately followed by a period of decline, with output
falling to about 700,000 barrels a day in 2020 and a further steady decline thereafter. This
extremely peaked pattern of production will have major impacts on the magnitude and
path of government revenues from oil. Because the contract for the ACG is on a profit-
sharing basis, in the early years of production, during the cost recovery phase, revenues
will be limited, but will then accelerate extremely rapidly after full cost recovery.
Production will increase roughly fivefold between the present and the peak; in 2004, the
it has been forecasted (World Bank 2004) that government revenues will increase almost
10-fold, under the assumption that the oil price will steadily decline from around US$40
in 2004 to US$26 a barrel in 2010. In its study, the World Bank projected fiscal revenues
to rise from about US$0.5 billion in 2004 to approximately US$5 billion in 2010, with a
decline to US$3 billion by 2020. Over a 20-year horizon, total oil revenues were
projected to be about US$70 billion. If oil prices remain higher than in these
assumptions, not only will revenues be higher, but large revenues will occur earlier.
5.4 The special characteristics of the oil revenue flow in Azerbaijan make its
situation akin to that of new oil-producing countries. The flows will accelerate quickly to
an extremely large level (relative to the size of the country) but then immediately start to
decline. This generates a need to presently save some of the revenues, both for future
generations, when the revenues will have declined, and because of the problems of
absorbing so much money if it were all spent as it is earned. In addition, because of the
volatility of oil prices, and the dominance of the oil sector for the budget, a policy for the
stabilization of government expenditures is needed.
5.5 The system of public finance within the economy has shaped the treatment
of oil revenues. Parliament exercises limited control over spending because it neither
drafts nor amends the budget submitted by the ministry of finance, but can only approve
or reject, with the latter being effectively a vote of no confidence. In addition, early
budgets were very brief, giving little line-item detail, thus there could be no debate on
planned specific uses of revenues. Hence, when the SOFAZ was established by
presidential decree in 1999, it was founded as a legally independent entity, answerable to
the president, and with powers to propose spending plans from the resources of the fund.
Before this, a special account at the national bank had been opened to sterilize some of
the bonus payments by keeping foreign exchange earnings out of the monetary system.
5.6 The oil fund, with explicit operating, investment, and expenditure rules,
was launched in July 2001, by presidential decree (appendix 4A). The fund was designed
explicitly to take account of the problems of managing a large and temporary inflow, and
the rules of operation were designed to be sufficiently flexible for use as either a savings
or stabilization function, as well as supplying budget-type support for specific projects.
Subsequently, the International Monetary Fund (IMF) and World Bank have supported a
program to improve the design of the fund through technical assistance and program
conditionality.
The State Oil Fund of Azerbaijan (SOFAZ) 71
5.7 The basic principles of SOFAZ suggested that expenditures from it would
be used for human development and the promotion of the nonoil sector, as well as for
budget support. In particular, it has been used also for assistance to refugees and funding
the share in the Baku-Tbilisi-Ceyhan (BTC) oil pipeline of the State Oil Company of the
Azerbaijan Republic (SOCAR).
5.8 Revenues from bonuses, the sale of profit oil from the production-sharing
agreements, rental fees, and acreage fees, as well as revenues from the investments of its
own assets, are all paid into SOFAZ; profit tax payments from SOCAR and the ACG
partners are all paid directly into the budget. At the end of 2004, the net assets of SOFAZ
were US$964 million, and over the period 2004 to 2024, about US$50 billion is
estimated as being paid to SOFAZ, with another US$20 billion being paid directly to the
budget. Currently, use of the fund’s resources in any year are limited to an amount equal
to the revenues of the fund in the same year, ensuring that the nominal value of the fund
does not decrease over time. Expenditures from the fund itself, whether as budget support
or project-specific outlays, have to be approved by the president.
5.9 Since 2003, oil revenues paid directly to the budget, which have been
inflated beyond expectations by high oil prices, have created an excess for the budget and
so have been placed into a separate stabilization account created by the ministry of
finance. These are held in domestic banks and can be drawn down when required,
according to a principle that they are to be used for stabilization only if the price of oil
drops below that in the current budget estimate. By mid-2004, another US$82 million had
been accumulated in this way, which reduces the need for SOFAZ to be regarded as
providing a stabilization role and lessens the need for its assets to be held in the short
term. This arrangement is rather informal and raises a number of questions about its
operation and use—in particular, whether the stabilization account should be
amalgamated with SOFAZ, which is acquiring investment management expertise in both
short-term and longer-term securities.
5.11 Decree 240 of 1999 established the existence of an oil fund, and this was
subsequently amended by Decree 849 of 2003. This legislation indicated which revenues
would be payable into the fund and that the primary purpose of the fund would be to
14
Key documents are taken from the SOFAZ Web site, www.oilfund.az/,and are reproduced in appendix 4.
72 Experiences with Oil Funds: Institutional and Financial Aspects
direct revenues toward the socioeconomic progress of the country. It also indicated that
the cabinet would draw up regulations for the operation of the fund. At this stage, there
was no indication that the fund would be used either for savings for future generations or
for stabilization; instead it appeared to be more in the spirit of the early stages of the
AHSTF. Until the fund was formally created, the relevant oil revenues were to be held in
a special account at the national bank. Decree 240 was extremely short compared to the
founding legislation for other funds, but it was designed to give time for the planning of
what the fund should do, and how assets should be invested, through later decrees.
5.12 The key legislation was embodied in Decree 434 of 2000 (amended by
Decree 849 of 2003), which created the regulations for the state oil fund. The regulations
indicated principles of the use of the assets of the fund and importantly limited total
expenditures from the fund in any one year to a maximum equal to its revenues in that
year. The objects of expenditures were stated in broad terms to be for the most important
nationwide problems, strategically significant infrastructure, and the purpose of the
country’s socioeconomic progress. These are clearly open to interpretation and give
flexibility, but they also impart the possibility of shifting priorities to meet short-term
political expediencies, rather than longer-term planned goals. One important provision
was that the fund’s assets could not be used for lending to government bodies or public
enterprises, nor as collateral for debts.
5.13 The SOFAZ management structure was also described in the regulations
decree (appendix 4B). There was to be an executive director, appointed and dismissible
by the president, whose duties were defined, and a supervisory board for giving opinions
to the director, but without any powers to vary policies. The composition of and
appointment to the board were not defined in detail in the initial regulations, except that
it would be appointed by the president and it had to meet at least once a quarter.
Reestablishment and liquidation of the fund would be carried out by presidential decree.
There was to be an external audit of the fund each year by an auditor appointed by the
president.
5.14 In 2001, two important decrees covered the investment and withdrawal
policies of the fund, making it fully operational. The rules for asset management were
issued in Decree 511, which limited the types of asset and currency that could be held
and specified the duties of the executive director and supervisory board in preparing an
investment plan. The rules appeared to envisage that all assets would be held abroad and
the majority of the investment would be in government securities and debt, with little
scope for equities. Decree 579 (amended by Decree 849 of 2003) is largely concerned
with the procedures for preparing the budgeted expenditures, which have to be presented
to the president for approval. Withdrawals were to be of two types: expenditures on
specific projects, in line with the broad policies adopted for the use of the fund, or a
transfer to the budget to be used for general budget support and not earmarked to
particular items. In line with these decrees, specific expenditures on displaced persons
were approved by further decrees in 2001 and 2002.
5.15 In 2004, the fund was given a more explicit requirement for saving for the
future by Decree 128, which ruled that once revenues reached their peak (around 2009),
at least 25 percent of each year’s revenue must be retained by SOFAZ. The decree
The State Oil Fund of Azerbaijan (SOFAZ) 73
indicated that in the medium term, expenditures from the fund would be determined on
the basis of the nonoil budget deficit, which was not to be sharply changed; in the long
term, a constant real expenditure pattern should form the basis of policy. A partial list of
objectives for spending was provided, which included developing the nonoil sector,
large-scale infrastructure, and poverty reduction. The requirement to save at least 25
percent of inflows once the estimated peak revenue has been reached should be seen in
the light of recent experience—35 percent was retained in the fund in 2003 and 50
percent was retained in 2004, indicating that a rapid accumulation is taking place during
the upswing of oil revenues.
5.16 The creation of SOFAZ and the further decrees have been accompanied by
lively press discussion. Not all of the press supported the creation of an oil fund. Worries
about the use of an off-budget fund were important, and some of those in favor wished to
subordinate it to parliament. The ad hoc decisions to spend fund resources on building
homes for refugees, and for financing the state’s share of the BTC pipeline, were debated,
and some critics questioned why the regular budget should not do this. International
NGOs opposed these moves, arguing for direct links to poverty reduction, but this was
countered by a group of domestic NGOs supporting the decisions.
5.19 Foreign companies deposit payments to SOFAZ into the fund’s special
account at the national bank, where it is absorbed into the investment program.
5.20 Taxes paid by SOCAR and foreign oil companies go directly to the
budget.
5.21 In 2001, the audit firm found some ambiguities in revenue rules, including
whether termination and abandonment payments, revenues from onshore fields, and
pipeline transit fees should be paid to SOFAZ or to the budget because of the phrasing of
the presidential decrees of 1999 and 2000: “other revenues obtained as a result of joint
activities with foreign companies.” This illustrates well the point that the complexity of
fiscal arrangement typical of the oil sector necessitates careful drafting of the legislation
if a split of revenues between a fund and the state budget is envisaged.
5.22 Withdrawal rules cover flows out of the fund. The legislation is clear as to
the maximum amount that can be withdrawn in any given year. Presently, this is equal to
the revenue inflow during the year (or expected during the year at the time of the budget
process), but it will fall to 75 percent of the revenue expected once revenues have
peaked, which is currently expected to be in 2009 or 2010. This regulation means that,
short of an enabling presidential decree, there is no mechanism for directing extra money
from SOFAZ back to the budget to meet a large unforeseen expenditure requirement or a
sudden inadequacy of the permitted transfer due to a very large fall in the oil price and
revenues.
5.23 The actual outflow from the fund is determined by the nonoil budget
deficit, as debated in parliament, plus special expenditures from the fund determined by
presidential decree, subject to the overall constraint that total expenditure must not
exceed the expected revenue of the fund in the same year. As noted, the rules governing
permitted expenditure from the Fund are broad, defined in terms of “the socio economic
progress of the country; for solving the most important national problems; and for the
construction and reconstruction of strategically significant infrastructure facilities”
(appendix 4D). Rules for the preparation of the SOFAZ annual budget also state that the
plans should take into account the “necessity to promote the development and increase
the competitiveness of the non-oil sector of the national economy
5.24 Three presidential decrees have authorized SOFAZ to spend on internally
displaced persons, and another decree in 2002 permitted SOFAZ to allocate expenditures
in support of SOCAR’s share of financing the BTC pipeline (US$118 million). This was
a controversial decision for a number of reasons. First, there was a question of whether it
went against the provision of the regulatory decree that forbade lending to state
enterprises, and second, the goals of the use of the fund explicitly state supporting the
nonoil sector and socioeconomic development. Despite initial IMF objections, it was
finally agreed that some pre-2000 bonus payments held on deposit at the national bank
(and therefore not directly in the fund) would be used for this purpose, and the
government agreed to transfer ownership of its stake in the BTC pipeline from SOFAZ to
the ministry of economic development so that oil fund expenditures remained consistent
with the regulations.
The State Oil Fund of Azerbaijan (SOFAZ) 75
5.25 Revenues directly from the oil sector have been dominated by the sale of
profit oil (estimated to be 86 percent of total revenues in 2004), with bonus payments,
transit fees, and acreage fees each making minor contributions. Revenues from asset
management come from two sources: the investment of the fund’s assets and income (or
losses) generated by revaluation of its foreign exchange assets. The revenues from
managing the assets of the fund amounted to about 7 percent of revenues from oil in
2004; currently, the dominant source of revenue is the payments from the oil sector, and
it is any unspent amount of this that gives substantial potential for the fund to continue to
grow.
5.32 The investment policy of the fund is based on an annual plan prepared by
the executive director, which is submitted, with the opinion of the supervisory board, to
the president for approval.
5.33 The asset management rules were set out in Decree 511 of 2001. The main
guidelines were on the currency in which assets could be held and the class of assets that
could be held. Foreign currency assets could be currency or investment assets
denominated in euros, U.S. dollars, yen, or pounds sterling, with other currencies with a
long-term country rating not less than S&P’ A (Moody’s A2) up to a limit of 5 percent of
the portfolio. Permitted assets included:
• Bonds and other securities issued by governments of countries that have
long-term country (sovereign debt) ratings of at least A (S&P, Fitch) or
A2 (Moody’s);
• Securities issued by financial institutions with state guarantees or by state
agencies and governments of countries with long-term country (sovereign
debt) ratings of at least A (S&P, Fitch) or A2 (Moody’s);
• Securities and bonds issued by international (supranational) financial
institutions (including but not restricted to the International Bank for
Reconstruction and Development (IBRD), the European Bank for
Reconstruction and Development, and the Asian Development Bank);
• Debt issued in the form of securities by commercial banks and other
financial institutions that have long-term credit ratings of at least A (S&P,
Fitch) or A2 (Moody’s);
5.34 When a portion of the oil fund’s foreign currency assets is managed by an
external manager, such an investment portfolio may comprise other investment assets,
including corporate debt and equities in addition to those listed above. External managers
shall have a credit rating of not less than AA− (S&P, Fitch) and Aa3 (Moody’s).
5.35 In addition, there are specific prohibitions that the oil fund’s investment
portfolio shall not be invested in:
• Currency arbitrage, swaps, forwards, and futures (except for the purpose
of hedging or optimizing the currency composition of the investment
portfolio and structure of the oil fund’s assets);
• Precious metals and stones;
• Real estate.
5.36 These rules permit the fund, but only through its external managers, to
hold equities, but this has not yet been exercised, nor is the proportion of the portfolio
that can be so held specified.
5.37 A benchmark for the performance of the fund was set through the annual
investment policy of the three-month U.S. dollar London interbank offered rate (LIBOR),
and a similar benchmark was applied to the external fund managers.
The State Oil Fund of Azerbaijan (SOFAZ) 77
5.38 In 2003, the portfolio was divided into an investment portfolio and an
expenditure portfolio. The latter kept funds earmarked for expenditures to ensure an
adequate liquidity profile and ensure that some income was generated on those funds
before they are called. Not surprisingly, the return on the expenditure portfolio (which
was about one-sixth of the investment portfolio) was modest, at about 1 percent. This
distinction was not maintained in the 2004 annual report.
5.42 The duties of the board are to review the fund’s draft annual budget,
which includes the important expenditure plans, review the annual report and financial
statements, and provide comments on these to the president.
5.43 The executive director of SOFAZ consults with and provides information
to the board, but is ultimately responsible to president, to whom he reports directly and
who approves the investment strategy. The board is expected to provide feedback on the
annual budget prepared by the executive director. It is supposed to meet at least once a
quarter, but initially met less than once a year.
5.44 The duties of the executive director, who is appointed by the president, are
to be vested with the powers to be legal representative of the fund; organize and conduct
the business of the fund, including appointment and dismissal of employees; manage and
disburse the assets of the fund in conformity with the regulations; be responsible for the
preparation of the SOFAZ annual budget, incorporating an annual program of the use of
assets; and submit this for presidential approval.
5.45 Outside auditors provide oversight in a report, which has been published
separately for financial years 2002, 2003, and 2004, and annual reports have been
published for all the years of the fund’s operation—as well as, more recently, quarterly
statements. In addition, parliament’s chamber of accounts is entitled to audit SOFAZ at
its discretion, but there is no provision of the publication of any such audit.
5.46 Azerbaijan has a transparent disclosure policy on oil revenues. The annual
reports and the regulations on the fund are publicized on the Web site (www.oilfund.az).
The reports give extensive detail on the sources of revenue from each stream being paid
into the fund and the banks in which deposits have been made. Latterly, brief quarterly
reports have also been published. Recently, Azerbaijan opted to join the Extractive
Industries Transparency Initiative and published initial reports on oil revenue flows
received for 2003 and the first six months of 2004.
Table 5.1: Flows into and out of State Oil Funds in Current Billion Manats and
Annual Returns at December 31a
Transfers
to budget
Contribution Net surplus & other End-year Nominal Real
Nominal
received on fund spending total return return
return
(manat) (manat) (manat) (manat)l (manat) (US$) (US$)
Initial 1243.70
transfer
2001 963.60 146.2 -3.6 2,349.90 8.51 3.87 2.25
The State Oil Fund of Azerbaijan (SOFAZ) 79
5.48 The fund has steadily accumulated assets, and in 2004 was equal to about
12 percent of GDP. Preliminary estimates indicate that by the end of September 2005, the
assets of SOFAZ had reached manat 5.8 billion (US$1.3 billion), reflecting the impact of
the large oil price rise during the year. In 2005, a small transfer was made to SOFAZ
from the special stabilization account created to accumulate surplus oil tax revenue.
Operating costs of the fund are approximately 0.1 percent of its value.
5.49 In foreign currency terms, the return on the fund’s assets was modest, and
below the return on foreign assets obtained during the same period by Alberta, Alaska,
and Norway, in large part because of the conservative investment policy that has been
adopted so far. For the first three years of the fund’s operation, the return, which was
largely from high-grade income securities, was 3.5 percent in U.S. dollar terms and 6.0
percent in local currency, but in 2004, local returns did not exceed dollar value returns.
For 2004, the breakdown of the fund by asset type is shown in table 5.2.
5.50 The annual reports also show the breakdown of total withdrawals. In 2002,
a transfer of manat 189 billion was made to the refugees committee, but no other transfer
was made to the budget; in 2003, manat 533 billion was transferred to the budget, manat
281 billion was paid out in respect of the BTC company, and manat 90 billion was paid
to the refugees committee. In 2004, manat 650 billion was transferred to the budget,
manat 89 billion to financing the BTC pipeline, and manat 75 billion to refugees, and
expenses were manat 3.6 billion.
Table 5.2: SOFAZ Assets, December 31, 2004 (current US$ million)
Investment type Amount Share (%)
80 Experiences with Oil Funds: Institutional and Financial Aspects
Assessment
5.51 SOFAZ has only a short history, but its role in the management of the
economy is becoming clearer as successive legislation, through presidential decrees, has
defined the investment and expenditure strategies more precisely.
5.52 From its inception, the fund has received an unusually high fraction of
total oil receipts, and the long-term prediction is that about 70 percent of all oil revenues
of the government will first be passed to the fund. This makes the rules and decisions on
expenditures from the fund of special importance. The constraint that spending from the
fund is limited to an amount equal to current revenues (yearly transfer to the fund plus
investment earnings) has the potential to allow it to accumulate assets very rapidly,
especially at a time when high oil prices are generating a budget surplus through the
receipts of revenues not paid into the fund. The tightening of the spending constraint to
permit only 75 percent of current revenues to be spent in any year (once peak revenues
are reached) implies that at least almost 20 percent of total oil revenues will then be
saved.
5.53 The recent decision to use fund revenues to cover the non-oil budget
deficit, plus any spending on special projects approved by the president, and a restriction
on total withdrawals from the fund, is moving toward a fuller integration of fiscal policy.
Budgetary plans have to take into account the likely oil revenue flows and adjust
expenditure and taxation plans to respect the overall savings decision implied by this
rule. The restriction to save at least 25 percent of revenues of the fund will provide a
tighter constraint, although at present, more than 25 percent is being retained in the fund.
5.54 Decisions on the size of the non-oil deficit are made by parliament
through its budgetary process; spending on special projects, such as the support for
internal refugees or the BTC pipeline, is determined by presidential decree. The bulk of
the withdrawals from the fund are made to cover the expected non-oil budget deficit, thus
the arrangement is also improving public accountability through the involvement of
parliament.
5.55 The distinctive feature of SOFAZ is its ultimate subordination to a single
agent, in the person of the president, in that the establishment, regulatory, and asset
management decrees were all determined by the president. Also, the president appoints
the executive director of the fund and approves the membership of the supervisory board.
This arrangement had the advantage of allowing rapid establishment of the fund and
The State Oil Fund of Azerbaijan (SOFAZ) 81
giving time to understand what legislation would be needed for the best long-run interest
of the country. Currently, discussions are under way with respect to passing a
parliamentary act concerning the nature and operations of the fund because, as with other
funds where the laws concerning them have not been entrenched in the constitution, thus
requiring a major political debate on any changes to be made, changes of direction could
easily be made and short-term needs could come to dominate the longer-term purposes of
the original ideas behind the creation of a savings-type fund.
5.56 The SOFAZ investment management strategy has to date been very
conservative, but this mirrors the experience of other funds, whereby all investments are
made in foreign-denominated assets and the class of assets is initially confined largely to
low-risk securities. With such a constrained investment scheme, the use of benchmarks
has been very simple, and the management of a large part of the portfolio by SOFAZ
itself has been relatively uncontroversial. If a more aggressive investment strategy
becomes desirable, then the guidelines on investments by market and assets, as well as
the definition of performance benchmarks, will become more important. In addition, a
technical advisory board could be established.
5.57 The actual control of the fund and oversight are more limited than in the
case of the funds in Norway, Alberta, and Alaska. The executive director is aided by an
investment committee drawn from senior staff within SOFAZ. Outsiders and technical
experts can be invited to attend, but this is discretionary, and actual use made of this
provision is unclear. In contrast to other funds, there is no formal role within SOFAZ for
external investment advisers with specialist knowledge of financial markets. The
supervisory board, which comments on the current investment strategy presented to the
president, consists almost entirely of ministers and also has no current representative
from the business community.
5.58 The transparency of the fund itself is well established, with a very detailed
Web site and the publication of all relevant legal material, as well as the annual reports
and the external audit. As the investment strategy becomes more complex, these will
need to provide more detail on the actual holdings of the fund to permit debate on
whether appropriate investment decisions are being made.
6
Some Other Resource Funds
6.1 In the last 30 years, several other resource-dependent economies have
established funds for either stabilization or saving or both. Details of most of these
experiences are sparse, and for several countries, almost nothing exists in the public
domain to describe the operation and magnitude of such funds.
6.2 For three countries, Kazakhstan, Nauru, and Papua New Guinea, there is a
certain amount of detail available, and the particularities of each case are very instructive,
so sections of this chapter are devoted to describing and analyzing what is generally
known about them.
6.3 Three countries (Chad, São Tomé and Príncipe, and Timor-Leste) have
recently passed legislation setting up resource funds just as the first payments for oil and
gas have started to be made to the governments. Because in these cases there has been
considerable international discussion and advice on the best approach to setting up such
funds, their legislation appears in appendixes 5–7.
6.4 Finally, there are other countries where only the outline of the funds and
their existence is publicly documented, and a short section is included on each to act as
an initial reference for more detailed within-country investigation. These countries are
Chile, Kuwait, Oman, Russia, and Venezuela.
6.5 The Chilean (copper), Nauru (phosphate), and Papua New Guinean
(copper) funds were financed by nonoil mineral revenues, but the principles underpinning
their working and their individual histories are particularly relevant to oil funds and thus
have been included.
6.6 Other countries that have previously experimented with some form of
fund, or have made some steps toward establishing a stabilization or savings fund,
include Kiribati, Trinidad and Tobago (Williams 2004), Turkmenistan (Kalyuzhnova and
Kaser 2005), and Iran (Amuzegar 2005) but these have been omitted for lack of detail.
83
84 Experiences with Oil Funds: Institutional and Financial Aspects
15
www.nationalfund.kz/.
16
www.nationalbank.kz..
Some Other Resource Funds 85
The stabilization mechanism depends on a reliable forecast for the oil price—too high a
forecast could deplete the fund, and then the sanctity of the savings fund could be
questioned. If the price stays at the reference price, all revenue goes to the budget:
however, this revenue, which would be expected to increase with the anticipated
increases in production, might be inadequate for a number of reasons—for example,
production might fail to keep up with the forecast, or needs might accelerate more rapidly
as a result of some unforeseen circumstance.
6.12 Government revenues from the oil, gas, and mining sectors eligible to be
paid in part into the NFRK are based on a specified number of companies’ returns.
Originally these included some 11 hydrocarbon and 3 mining companies, but later these
were reduced to just 6 hydrocarbon companies. Payments of corporate income tax, excess
profits tax, royalties, value added tax (VAT), bonuses, and PSAs are included. In
addition, the earnings from the fund are paid into the savings account. Finally, there can
be discretionary payments, determined by the president, such as proceeds from
privatizations that are paid into the savings account.
6.13 The first payment into the Fund was from the sale of the government’s
share in the TengizChevroil consortium and a related bonus payment. In 2001,
contributions from the companies to the government were US$1.1 billion, of which
US$576 million went to the NFRK and US$500 million went to national and local
budgets (accounting for about 40 percent of government revenues).
6.14 The investment strategy is based on that of the NGPF in respect of the
standard portfolios, their duration, and principles for selecting external managers.
Management of the NFRK’s assets is undertaken and overseen by the central bank. As
well as directly managing part of the assets of the fund, the bank has retained several
Western portfolio managers to provide diversity in investment styles (they also provide
training to the national bank’s personnel to help them carry out in-house investment)
while managing a portion of the portfolio. There is also a separate custodian of the fund,
selected by international competitive bidding.
6.15 The plan is to hold about 75 percent of assets in the savings portfolio and
25 percent in the stabilization portfolio. Both portfolios are invested entirely abroad to
sterilize the economy against appreciation of the real exchange rate, and the stabilization
portfolio has no equity assets—it is instead held in short-term liquid assets. About 60
percent of portfolio is held in the United States, with most of the rest in Europe and
Japan.
6.16 The ministry of finance sets benchmarks for the fund, and the central bank
reports to the ministry on the performance of the fund relative to the benchmarks. The
savings portfolio is based on a benchmark of the Merrill Lynch six-month U.S. Treasury
Bill Index. The benchmarks for the stabilization portfolio are 75 percent based on the
Salomon World Government Bonds (SWGB) Index (80 percent U.S.-dollar-hedged) and
25 percent based on the Morgan Stanley Capital International (MSCI) world index,
excluding the energy sector. The class of assets for permitted investment in the savings
portfolio includes:
86 Experiences with Oil Funds: Institutional and Financial Aspects
Table 6.1: Budget Revenues from Oil and the NFRK at December 31
(current US$ millions)
2001–
1999 2000 2001 2002 2003 2004 04
Budget revenue 158 604 1,430 1,075 1,900 NA NA
from oila
NFRK assets 0 0 1,240 1,915 3,663 5,131 5,131
Return — — 2.86 −0.43 8.69 7.61 5.16
Not Available (NA),
a
. Excludes bonuses, privatization receipts, and other exceptional payments.
6.19 Net payments into the NFRK have rapidly increased its size, and the latest
figures for 2005 reveal that by December, the fund’s had increased to US$8.0 billion. The
fund currently has a value equal to about 5 percent of GDP.
obtained a return of 1.42 percent against the benchmark of 1.22 percent, while the
savings portfolio had a value of US$3.8 billion and obtained a return of 9.33 percent
against the benchmark of 9.46 percent. The savings portfolio performed worse that its
benchmark, and this resulted in the government deciding to conclude the investment
management agreement with the U.S. money market mandate external manager and place
this part of the portfolios entirely under the management of the national bank.
6.21 In respect of its accountability, the NFRK has fewer checks than other
major oil funds, and all checks are directly overseen by the president. Parliament has only
a peripheral role—the creation of the fund involved neither parliament nor the public.
Figure 6.1 shows the principal lines of control. The main feature is that the president
alone can make changes to the NFRK, and parliament receives reports on the
performance of the fund, but cannot approve, reject, or amend them. Only the president
can propose spending from the NFRK, and there are no guidelines on permissible
expenditures, although these do have to be approved by parliament. Moreover, the fund is
not integrated with the budgetary process, a point that has been highlighted by the IMF.
6.22 The powers of the president in relation to the Fund are wide-ranging and
include (Tsalik 2003):
• Exclusive rule making for the fund;
• Authority to designate transfers from the fund;
• Authority to issue binding regulations concerning the fund to the oversight
council, government, and national bank;
• Authority to approve the annual report submitted by the ministry of
finance
• Authority to approve the external audit;
• Power to control activities concerning the management of the fund;
• Ability to dissolve the fund, because it was created by presidential decree.
6.23 The oversight council, which has rather limited powers, consists largely of
presidential appointees, including the prime minister, the head of the presidential
administration, the chairman of the national bank, the deputy prime minister, the finance
minister, the two speakers of parliament, and the chairman of the state budget control
committee. Two members of the committee, the chairman of the national bank and the
finance minister, are responsible for managing the fund and thus exhibit potential conflict
of interest.
6.24 The national bank produces daily, monthly, quarterly, and annual reports
for the finance ministry on the investments, but these are not made public. Periodic
statements on accumulation in the fund are published in the press. The annual report and
audit are not published in full, but a truncated summary is publicly available.
88 Experiences with Oil Funds: Institutional and Financial Aspects
Assessment
6.25 The NFRK has clearly articulated rules for accumulation or withdrawal,
but these rules are not presently formally linked to overall fiscal policy. The procedures
for managing the investments mirror those used in other well-established funds.
6.26 Several aspects of the NFRK have attracted criticism:
• Excessive control exercised by the president,
• Rigidity of the rules for accumulation,
• Lack of full public disclosure of the fund’s performance,
• Lack of integration with the overall fiscal policy.
6.27 Although on a daily basis the fund is organized to work without recourse
to presidential approval, all major decisions, including accepting the audits, controlling
the management of the fund, and altering rules on the payments into and out of the fund,
have to be made by the president. Although these powers do not currently appear to have
acted to the detriment of the operation of the fund itself, there is certainly the possibility
of diverting it to a more political agenda.
6.28 As an operational detail, the rigidity of the stabilization rules, and the
linking of the amount saved to a fraction of projected receipts, based on a price forecast
that is made only every five years and is presently much too low, can lead to great
imbalances in the fund. There could be too much devoted to stabilization, caused by the
excess revenues received, and too little to savings, with no adjustment made according to
increased current expenditures that might be justified by either higher revenues or
increased needs of the economy. However, a presidential order could be used to correct
an obvious imbalance in the fund.
6.29 The lack of full transparency for the fund prevents informed public
discussion on its performance and use. The partial and occasional release of data on the
size of the fund through the Kazakhstan News Bulletin and the summary of the audit and
annual report give some information on its workings, but the lack of detail and regular
publication is in sharp contrast to the situation for other large oil funds. The central bank
report for 2004 provides the basic data on the performance of the NFRK and its
constituent portfolios, but as yet this information source gives only limited material.
6.30 The rules for payments into the savings and stabilization accounts of the
fund indicate a lack of formal integration with the budget process and failure to make
explicit the consideration of maintaining long-run wealth. The rule for saving 10 percent
of budgeted revenues based on a projected oil price has already been shown to be
inadequate. Unless future savings decisions take into account the under-prediction of the
oil price during the past several years, the amount saved is likely to be inadequate for the
preservation of real wealth. At the same time, the rules could have led to over-
accumulation in the stabilization account because the oil price is unlikely to return to
US$19 a barrel in the foreseeable future.
Some Other Resource Funds 89
President of Kazakhstan
Established the fund by decree
Exclusive power to make and change rules of the fund
Approves annual report of finance ministry
Determines composition of oversight council
Ministry of finance
Develops rules for reporting
External auditor
Reports to finance National fund: national bank,
ministry department of monetary
operations
Converts transfers into foreign
exchange
Oversees asset managers and
custodian
Performs own investments
Reports to ministry of finance
17
Source: Tsalik (2003)
90 Experiences with Oil Funds: Institutional and Financial Aspects
18
Reserves estimates are made using a combination of geological and engineering data. Initial estimates
normally vary when production data are obtained to provide a more reliable reservoir model. Reserves
were estimated for three fields declared commercial by the operator.
19 Projections were based on an average Brent price level of US$18 per barrel.
Some Other Resource Funds 91
6.33 By the end of the third quarter 2005, almost 118 million barrels of oil had
been shipped to international markets. As a result, Chad received approximately US$354
million in upstream royalties20. In 2004, the first full year of production, the petroleum
sector accounted for about 30 percent of GDP.
6.34 In January 1999, Chad promulgated Petroleum Revenue Management Law
001, which provided for most of the direct revenues (royalties and dividends) from the
fields of Miandoum, Kome, and Bolobo (the “Three Fields”) to be used for priority
poverty reduction and development purposes21. The law also established the Collège de
Contrôle et de Surveillance des Ressources Pétrolières (CCSRP), a joint government–
civil society body whose task is to oversee and monitor the spending of the government
revenues generated by the Three Fields. In accordance with the provisions of the law and
related decree laws,22 all direct revenues (royalties and dividends, net of the repayment
of IBRD and European Investment Bank (EIB) loans directly related to the Doba project,
and of applicable offshore account management fees) from the exploitation of the Three
Fields were to be allocated as follows:
• Ten percent of revenues is to be deposited in a future generations fund
(FGF) held offshore and invested in long-term external assets.
• Of the remaining 90 percent of direct revenues:
o Five percent of royalties is allocated to the Doba oil-producing
region, to be disbursed by local authorities in accordance with the
regional development plan and under the supervision of a regional
oversight committee.
o Fifteen percent is allocated to the country’s general budget for the
financing of recurrent government expenditure for a period of five
years from the date of production.23 After that time, it is to be
added to priority sector spending.
20 Chad currently uses a tax and royalty regime for hydrocarbon exploration, development, and
production. The new hydrocarbon code currently under preparation contemplates the introduction of
production-sharing contracts. To date, the bulk of the revenue going to Chad has come from royalties
levied on net sales of crude oil from the producing fields, signing bonuses, and share premia from its share
capital in the oil transportation companies. In fact, the revenues generated by the upstream activities have
not yet been sufficient to cover the costs of these activities (0perating costs, noncapitalizable investments,
and asset depreciation). Consequently, no corporate income tax has yet been paid to the government of
Chad to date on account of upstream activities. However, mainly on account of high oil prices, revenues
from corporate taxes are expected to become significant starting from 2007.
21
Laws and decrees for Chad are set out in appendix 5.
22 Decree 238/PR/MEF/03 creating a mechanism for sterilization of the revenues derived from the
exploitation of the fields of Kome, Miandoum, and Bologo.
23 Although Law 001/PR/99 provides for the 15 percent to be allocated to general budget needs for five
years from the date of production (that is, until October 2008), Decree Law 238/PR/MEF/03 specifies that
the Banque des Etats de l’Afrique Centrale (BEAC) shall transfer this amount into the current account of
the treasury —with the BEAC—December 2007. It is unclear what the payment modality will be after that
date.
92 Experiences with Oil Funds: Institutional and Financial Aspects
Figure 6.2: Simplified Diagram of Oil Revenue Flows in Chad as Provided for in
Law 001/PR/99, as amended, Decree 238/PR/MEF/03, and Decree 239/PR/MEF/03
IBRD and EIB debt service and debt service reserves Indirect
revenues
Net direct revenues to Chad
10% of direct revenues 90% of direct revenues
FGF (BEAC)
Special oil revenue account (commercial bank)
spending plans from the BEAC, the regional central bank, to the special accounts of the
treasury with two Chadian banks for budget execution.
6.37 Decree 239/PR/MEF/04 established a mechanism to stabilize expenditures
financed by the revenues derived from the Three Fields with the objectives of:
• Ensuring the stable and sustainable financing of poverty reduction
expenditures;
• Avoiding pro-cyclical expenditures;
• Ensuring the effectiveness of expenditures;
• Strengthening budget discipline and reducing the vulnerability of public
finances to external shocks;
• Ensuring the application of the additionality principle.
6.38 Both the direct revenues earmarked for expenditure in priority sectors and
the non-earmarked direct revenues were affected by the decree. Any positive difference
between actual earmarked and non-earmarked resources and actual expenditures financed
by these resources was to be deposited in the stabilization account. Should expenditures
be higher than the revenues, the difference would be withdrawn from the stabilization
account. An automatic rule was established to adjust the expenditure patterns: if the
actual direct revenues were more than 20 percent lower than the estimated direct
revenues for a consecutive period of three months, the government had to reassess the
macroeconomic framework and adjust medium- and short-term expenditure accordingly.
There was no limitation on the size of the withdrawals, and there were no specific rules
to determine the sustainability or effectiveness of expenditures financed by these revenue
flows. To ensure the application of the principle of additionality, the decree provided that
priority expenditures financed by means of non-earmarked revenues be no less than 42.6
percent (its level in 2002). 26
6.39 The FGF was regulated by Decree 96/PR/MEF/04. In accordance with the
provision of Law 001/PR/99, 10 percent of net direct revenues as well as earnings on the
fund were to be set aside for future use. Funds could be withdrawn from the FGF only if
the total government revenues from the Three Fields were less than 10 percent of the
total government revenues in the preceding year, up to the limit of the previous year’s
inflows into the FGF (revenues and interest). Funds withdrawn from the FGF could be
used only in accordance with Law 001/PR/99 and under the supervision of the CCSRP.
An investment committee, presided over by the prime minister, was responsible for
defining the investment strategy, selecting portfolio managers, monitoring investment
results, and preparing monthly performance reports. Audit and performance reports were
then to be published by the government. The minister of economy and finance was tasked
with the presentation of a report on the performance of the FGF to the parliament upon
26
It is important to note that the additionality principle has been observed only at budget preparation and
not at the budget execution level.
94 Experiences with Oil Funds: Institutional and Financial Aspects
presentation of the budget law. The management of the FGF was entrusted to the BEAC27
through one or more international portfolio managers, whose selection was to be
approved by the investment committee. The management contract between the BEAC
and the portfolio managers, also to be approved by the investment committee, defined the
investment strategy, oversight, audit, and disclosure mechanisms. The FGF was created
in June 2004, and by September 2005 had accumulated US$27 million. To that date, the
government had not formulated its investment strategy and oversight procedures.
Therefore, no tender for the selection of the portfolio managers had been launched.
6.40 In respect of the existing agreements related to the monetary cooperation
among the member states of the regional central bank (BEAC), several agreements were
established between the government and the BEAC for the implementation of the
revenue management framework established by the authorities. These agreements set
forth the procedures for the management of various accounts: (a) the direct revenues
allocation account, (b) the stabilization account, (c) the oil-producing region’s account,
and (d) the FGF.
6.41 Oversight and transparency were guaranteed through a series of
supervisory bodies and the publication of various reports and audit reports, as
summarized in table 6.2.
27
The BEAC and the government of Chad negotiated a protocol of agreement that sets out the procedures
for managing the FGF and the remuneration of BEAC for its services
Some Other Resource Funds 95
Stabilization account CdC and Supreme Court Verify the legality of Annual audit published
(BEAC) account management by the government
and utilization
CCSRP Oversees the application Annual report published
of the stabilization by the government
mechanism detailed in
Decree 239/PR/MEF/03
Producing region CdC Verifies account Annual audit conducted
account (BEAC) balances by the CdC and
published by the
government
Supreme Court Verifies correct Annual report produced
application of the laws by the Supreme Court
and published by the
government
CdC Chambre des Comptes; CEMAC Communauté Economique et Monétaire de l’Afrique Centrale;
COBAC Commission Bancaire de l’Afrique Centrale ; PRSP Poverty Reduction Strategy Paper
96 Experiences with Oil Funds: Institutional and Financial Aspects
28
See Law 001/PR/99, Decree 240/PR/MEF/0E.
29
The producing region committee is a temporary body created to manage the utilization of direct revenues
from the Three Fields allocated to the producing region in application of the provisions of Law 001/PR/99.
This was done while waiting for the creation of the “descentralized communities,” subregional bodies
created to implement the decentralization process provided for in the constitution.
30 In particular, the abolition of the FGF; the substantial modification of the earmarking scheme; the
inclusion of security, justice, and territorial administration among the priority sectors; and the changes in
the composition and governing rules of the CCRSP were judged to substantially weaken the poverty focus
of the revenue management program.
31 See press statement released on January 6, 2006, by the World Bank, www.worldbank.org.
Some Other Resource Funds 97
32 The country has been facing a liquidity crisis, with accumulation of arrears, notably on the payment of
pensions and wages. However, these problems have several causes, particularly cash management issues,
and they cannot be explained solely by the restrictions imposed by the revenue management framework.
98 Experiences with Oil Funds: Institutional and Financial Aspects
33 Normally, direct revenues tend to be more important at the beginning of production, and indirect
revenues increase after cost recovery is reached.
34
www.transparency.gov.tl/.
Some Other Resource Funds 99
In February 2005, a draft act was published (appendix 6A) and comments were invited,
which were made public on the ministry of finance’s Web site. The World Bank, IMF,
several major NGOs, and individuals made extensive comments on the draft, and the
final version was approved by parliament in July 2005. The first quarterly report of the
fund was produced in September 2005.
6.53 The main features of the proposed act, based on the so called “Norway
plus” model, are presented in the executive summary of the act:
• There will be a separate petroleum fund, where the government has
overall responsibility for management. The minister of planning and
finance will have direct responsibility for oversight. The fund itself will be
managed by the central bank, subject to a management contract, and the
bank can contract out the management of a portion of the fund to
independent managers. The minister will submit an annual report on all
aspects of the fund (payments in and out and returns) to parliament.
• There will be an independent investment advisory board advising the
minister on any matter relating to the management of the fund. It would
recommend benchmarks for fund performance, advise on the performance
of managers, and make recommendations on the appointment or removal
of managers. The board will be made up of the director of the treasury, the
head of the central bank, two persons with significant investment
management experience, and one other person.
• There will be a consultative council appointed by parliament comprising:
o Former presidents,
o Former speakers of the house with at least three years experience,
o Former ministers of finance with at least three years experience,
o Former heads of the central bank with at least three years
experience,
o A person appointed by the president,
o A person appointed by parliament,
o A person appointed by the government,
o A person representing civil society nonprofit organizations,
o A person representing private business,
o A person representing religious organizations.
6.54 The council will advise parliament on all matters relating to the fund and
on appropriations from the fund when they are greater than the calculated sustainable
income of the fund.
• There will be external audits of the fund by an internationally recognized
accounting firm, which will also certify estimates of sustainable income
and prepare a report on payments made by companies to the fund.
100 Experiences with Oil Funds: Institutional and Financial Aspects
was passed, transferred US$80 million from the first tranche petroleum account
accumulated since 2000 into the fund. It also transferred US$125 million from the
consolidated fund. These sums were invested in U.S. securities and passively managed to
track the benchmark Merrill Lynch zero- to five-year government bond index. A separate
department to manage the fund was established within the bank and payments authority,
and a training program for staff was implemented. The IMF provided an adviser to help
with the establishment of the operation framework of the fund.
Assessment
6.59 The act is designed so that all aspects relating to the collection and use of
oil and gas revenues are highly transparent and society and parliament are given enough
information to react to their use and the performance of the TLPF. There are numerous
checks and balances built in for oversight and reporting. This should ensure proper use of
the fund in accordance with both the act and the wishes of parliament, which will make
the crucial decisions on withdrawals from the fund. The act governing the use of fund
revenues is notable in that, although the only use of revenues is to cover the nonoil
budget deficit, there is an explicit constraint that withdrawals should not decrease the
permanent income derivable from the fund. Where the proposed nonoil budget deficit
would do so, then the consultative council will report on the issue to parliament, which
will make the final decision on whether the proposed budget deficit should stand or the
real value of the fund should be maintained. In Norway, the requirement to explicitly
refer to a long-run goal is not embedded in the legislation describing the operation of the
NGPF. Although in both cases parliament makes the final decision, the Timorese version,
whereby there must be a formal debate on this issue (following a report by a body of
experienced members of society, several of whom have no formal political role), is an
attempt to give the opportunity for a mature reflection on the impact of current budgetary
proposals where these would result in the reduction of the permanent income generated
by the fund.
D. The National Oil Account and Permanent Fund of São Tomé and
Príncipe (STPPF)
6.60 The West African island group of São Tomé and Príncipe achieved
independence in 1975. It has been a predominantly agricultural economy, which suffered
when the international price of cocoa fell. Despite a substantial economic reform
program, its per capita GDP in 2004 was still only US$388.
6.61 In 2001, Nigeria and São Tomé and Príncipe reached agreement on joint
exploration for oil in waters claimed by the two countries, and in 2003, the joint
development zone was opened for bids. The imminence of signing bonuses, to be
followed later by royalties, which would be very substantial in relation to the size of the
economy, and the examples from neighboring West African countries of the difficulties
of managing such large flows for the benefit of the country, persuaded the government to
pursue a strategy of planned management of the revenues. A number of institutions,
including Columbia University and the World Bank, combined to provide assistance in
designing this strategy and drafting a law to implement it. Parliament passed such a law
in December 2004.
102 Experiences with Oil Funds: Institutional and Financial Aspects
once production has started, is to protect capital and prevent borrowing against future
revenues.
6.66 To make this process operational, the act then defines how expected future
oil receipts are to be calculated. Amounts (estimated by block operators) only from
producing fields are to be taken into account, and these are valued at the average Brent
price for the previous 10 years less a discount for the quality of the oil produced. This
rule faces two problems: first, as very recent experience illustrates, oil prices are not
obviously mean reverting, so that the future prices cannot be expected to average out near
the past 10 years’ prices, and the forecast price will only slowly move toward the newer
level of prices established, resulting in too much saving in the fund relative to the goal of
keeping its real wealth constant; second, given that the discount for different qualities of
crude oil is sensitive to a number of factors, including the general oil price level and
refinery configurations and capacities for markets where the crude is sold, the expected
monetary value of oil revenues may prove difficult to estimate accurately.
6.67 The long-term real rate of return, used to calculate the permanent income
value of the oil to be produced, is to be based on the expected real rate of return of the
assets held in the permanent fund, which is not to exceed 5 percent.
6.68 In addition to calculating a cap on the amount that can be transferred to
the budget, the law also specifies restrictions on how this money is to be spent, which
includes an allocation of at least 10 percent of the total annual funding amount to local
budgets and 7 percent for public expenditure in the autonomous region of Príncipe.
6.69 The management and investments of the oil revenues in the oil accounts is
the responsibility of a management and investment committee, which has to act in
accordance with the prudent investor rule. The committee consists of five members,
including the minister of planning and finance as chairman, the governor of the central
bank, one member appointed by the president, and two appointed by the national
assembly (one of whom will represent the opposition parties). The latter three persons
serve for two years, renewable once, and must have experience of managing international
investment portfolios. In addition, there is a petroleum oversight commission of 11
members, appointed by different bodies, including business, unions, and NGOs. The
commission oversees compliance with the law of expenditures of the annual funding
amount, the management of oil revenues, enforcement of transparency rules, and the
audits.
6.70 All investments are to be outside the country, and a list of permitted
instruments is provided in the act. The fund itself cannot be used as collateral for
government borrowing. The management and activity of the fund are audited annually by
the auditor general and also by an international auditing firm. The audit reports are sent
to the president, the national assembly, the government, the petroleum oversight
commission, the principal solicitor’s office, and the public registration and information
office.
6.71 A transparency principle is included in the law to ensure that all payments
into the accounts and all transactions and balances are made public, as are the agreements
104 Experiences with Oil Funds: Institutional and Financial Aspects
with fund managers, oil revenue forecasts, and all contracts entered into by the state
where these directly or indirectly concern activities related to oil revenues.
Assessment
6.72 The São Tomé and Príncipe Oil Revenue Law reflects the primacy of a
target size of the oil fund, rather than a broader fiscal criterion, in that the transfer to the
permanent fund could be greater than that required to maintain the country’s permanent
wealth. An innovation in the law is a set of provisions for the treatment of initial bonuses
spread over a period until the oil is actually produced. The oversight arrangement and
transparency provisions also reflect the best practices that have evolved in other
countries, and they go beyond these insofar as they require that oil contract details will be
published (except for information on proprietary industrial property rights). The
legislators have preferred a very prescriptive approach to the definition of permanent
revenues and spending rules that may prove too rigid if unexpected expenditures are
higher than the annual transfer, because the government may then be forced to borrow.
alternative revenue raising that were highly questionable. Concerns about the 450
offshore bank “shells” that were registered in Nauru, with virtually no supervision, and
which could facilitate money laundering, led the United States to declare it the first
“rogue state” under the 2001 Patriot Act.
6.80 The public spending and savings decisions were so poorly executed and
open to so much fraud, it has been suggested that the Alaska solution of the distribution
of most of the phosphate revenues annually to the citizens would have produced a better
outcome. Many would have saved for the future or invested in or consumed items that
would have benefited them directly. At the same time, the reduction of such an extensive
welfare state and guaranteed employment would have maintained a greater level of
entrepreneurship in the economy, which has by now almost vanished. The very sharp
peak in resource rent flows, followed by its rapid decline, also suggests that a less
aggressive extraction policy should have been followed, particularly because, given the
nature of the resource and the size of the island, further supplies would not be found.
6.81 The role of the NRPTF has been unclear. Its accounts have not been
available, thus information on payments in and out, and on capital gains and losses, has
not been publicly disseminated. Even multilateral development institutions, such as the
Asian Development Bank, which have been working with the government to rescue the
situation, have been hampered by an almost complete lack of economic statistics (Asian
Development Bank 2005). However, certain remarks can be made:
• The rules for payments into and out of the NRPTF are not clear, but
judging by the government’s actions, they were free to withdraw both
interest and capital.
• The fund was able to be used as collateral for government borrowing,
which is expressly forbidden in most countries with savings funds of this
type.
• There appears to have been no published investment policy guide (for
example, limiting the class of assets chosen or providing benchmarks on
returns required).
• The arrangement for oversight of the fund in terms of its investment
performance is also not transparent.
• The details of the size of the fund and transfers into and out of it do not
appear to be published, and the auditing arrangements are also unclear.
• There was little public discussion of the strategic uses of the fund and the
likely course of phosphate revenues, leading possibly to overoptimistic
expectations by the public of the size and duration of government
spending from this source of income, which in turn resulted in a low level
of public pressure to alter spending policies.
Assessment
6.82 The Nauru experience illustrates all the problems of the “resource curse”:
Some Other Resource Funds 107
sustainable over a five-year horizon (Daniel 1985, Lum and others 1995, Allan C. Clark
2001).
6.87 However, there was a major change in late 1998, when strikes and
sabotage at the Bougainville mine led to its closure in May 1989. These actions were
related to issues concerned with land ownership and secession. The closure of the mine
had a significant impact on exports (losing about 20 percent of the total) and on the
government’s revenue from mining. Since 1972, the mine had contributed about 17
percent of Papua New Guinea’s internal revenues, 12 percent of GDP, and 45 percent of
export earnings. Moreover, the government then spent a large amount to quell the
Bougainville uprising. The unanticipated closure of the Bougainville mine in 1989
changed the country’s revenue and expenditure plans completely. Revenue fell
precipitously and expenditure rose, and withdrawals from the fund started to accelerate.
In addition, the government changed the rules concerning payments into the fund, and
from 1988, some receipts from government equity were directed instead to a new
destination, the Mineral Resources Development Corporation (MDRC), which was a
state-owned enterprise intended to take up state equity in mining as the government tried
to further develop the value of its natural resources. The MDRC is the parent company of
Petroleum Resources Kutubu, which manages the country’s 22.6 percent share in the
Kutubu oil project. Even after the Bougainville mine closed, government spending
continued to rise, and the government started borrowing. By 1994, debt repayment and
service accounted for one-third of budget, and the government then negotiated a loan
from overseas private investors on the condition that interest and repayment would have
first call on mining and petroleum revenues that otherwise would have gone to MRSF.
6.88 Further losses of minerals revenues were felt in 1988, when the Ok Tedi
mine ceased to produce gold and produced only copper. Also, from 1998, a period of
drought affected agriculture and mining, which, coupled with the Asian financial crisis
and poor fiscal management, led to a significant shortfall in government revenues. The
MRSF accordingly was completely depleted in 1999 by withdrawals to the budget.
Finally, in 2000, an act of parliament was passed that repealed the act creating the MRSF,
and it was thus wound up both legally and financially.
6.89 The MRSF was managed by a board of senior public servants, and the
balances were invested by the central bank and held as local currency and not invested
abroad. The managers made an 8-year projection of the copper price each year; until
1983, this was to vary by not more than 10 percent from the 20-year average historical
real copper price in U.S. dollars. In 1983, this was amended to allow the projection to fall
more than 10 percent below this average. The same procedure applied for gold, except
that the historical average covered only the single preceding year. Only revenues from
already producing mines could be included in the revenue forecast. The managers’
recommendations about how much could be paid out to the budget was expected to vary
by not more than 20 percent in real terms from that of the previous year, but the minister
of finance had the discretion to vary this by a further 10 percent (32 percent in real
terms). An amendment in 1983 allowed the managers to reduce proposed payments by
more than 20 percent. Withdrawals from the fund were subject to parliamentary approval.
Some Other Resource Funds 109
6.90 Until the late 1980s, the fund was successful in accumulating resources,
and flows to the budget were by and large more steady than revenue flows into the fund.
The increasing inflows from the new mines also permitted increased government
spending as well as a steady increase in fund value, as shown in table 6.3. However, an
assessment by the government itself in 2000 concluded that fiscal stabilization had not
been achieved through the use of the fund because of the willingness of the government
to increase the amount of debt (Morauta 2000).
6.91 However, the loss of revenue from Bougainville and the continued
increase in government spending, coupled with the creation of the MRDC, signaled a
switch in government policy to active investment in the sector to boost future minerals
revenues, which looked to be in decline. As a result, the MRSF was depleted in a single
year and terminated in the following year.
Table 6.3: Flows into and out of the MRSF (current million kina)
Year Total MRSF receipts Withdrawals to budget Fund balance
1973–74 28.0 28.0 0.0
1975–74 34.7 34.7 0.0
1975–76 62.9 45.0 17.9
1976–77 24.6 35.0 7.5
July–Dec 1977 23.8 17.0 14.3
1978 21.1 32.0 3.4
1979 39.4 38.5 4.3
1980 108.7 56.6 56.4
1981 71.4 81.4 46.4
1982 25.4 40.0 31.8
1983 25.0 21.0 35.8
1984 55.5 29.7 61.7
1985 23.7 32.1 53.3
1986 36.0 14.0 75.3
1987 26.8 36.4 65.7
1988 91.4 57.1 100.0
1989 119.7 84.7 135.0
1995 282.0 170.0 302.0
1996 424.0 195.0 531.0
1997 452.0 165.0 696.0
1998 311.0 330.0 677.0
1999 309.0 986.0 0.0
2000 20.0 20.0 0.0
Note: From 1976 to 1994, the kina was pegged to a basket of Papua New Guinea’s trading partners. From 1994, the kina has been
floated and was at US$0.30 in 2003.
Sources: Annual Reports of Ministry of Finance quoted by: Lum, and others (1995) with 1987 corrected; Clark (2001); Daniel (1985).
Assessment
6.92 The MRSF was designed as a stabilization fund to give some smoothing
of government expenditures against fluctuating commodity prices. It achieved its purpose
in accumulating assets at times of high resource revenues and indeed lasted for almost 30
years. The closure of the Bougainville mine in 1998, despite the increase of revenues
from other sources, was a major blow to the government’s fiscal policy. It had accounted
for about 20 percent of export earnings and a large share of the government’s revenues.
At the same time, the needs for government spending continued to rise, so that a more
110 Experiences with Oil Funds: Institutional and Financial Aspects
aggressive stance on encouraging further investment into the extractive sector was
pursued by use of funds diverted from the MRSF to the MRDC.
6.93 The fund was treated as part of the government’s assets and was not a true
investment fund, because the policy of allowing the central bank to manage its assets and
hold them only in domestic currency limited the variety of investments and its returns.
Governance was exercised by the group of senior public servants charged with the
management of the fund, and its accounts were audited as for other parts of the budget.
6.94 The rules of payments out and in were an attempt to find a compromise
between smoothing government revenues and ensuring that a change in the Fund’s assets
would not be too violent, by limiting payments out to at the maximum 20 percent more
(or less) than the previous payment. In fact, this rule proved to be unworkable at certain
times, and ministerial discretion had to be used to make larger withdrawals. Furthermore,
the need to define a sustainable level of payments by taking a revenue forecast that
depended on the future prices of the minerals, while also constrained to be not too far
from the historical average price, demanded a degree of specialist knowledge from the
managers of the fund.
6.95 At the time of the establishment of the MRSF in 1974, there was much
less concern globally about transparency and less awareness of the dangers for resource-
dependent economies of nontransparent payments and expenditures. Little information
about the fund and its performance appeared, except for the bare summaries of flows in
and out and the total fund value, but its strong links to the budget suggest that it was
subject to adequate parliamentary oversight. The weakest aspect of management appears
to have been the constraints on investment policy and the lack of published details on
performance, which might have given more impetus to improving the returns on the fund
and the debate regarding its best use.
6.98 In 1985, the government formalized this arrangement by creating the CCF,
which started accumulation in 1987. This fund had the sole purpose of partial
stabilization of the budget revenue against variations in the world copper price. The
trigger mechanisms for payments into and out of the fund were determined in agreement
with the World Bank. The source of revenues for the fund is the payments from its
exports by the state-owned copper company, Cooperación del Cobre SA (CODELCO). A
reference long-term copper price was established at each budget cycle, again based on the
historical average of six years’ past copper prices.
6.99 Each quarter thereafter, the actual price is compared to the reference price,
and an allocation of the excess (or deficit) revenue is made between the central budget
and the fund, according to the following rules:
• If the price is less than US$0.04 above the reference price, all the excess
revenue is paid into the budget (the difference between the reference price
and actual price times the volume of sales in that quarter).
• If the price is less than US$0.10 above and more than US$0.04 above,
then this part of excess revenue (the difference between the reference
price plus US$0.04 and the actual price) is shared equally between the
government and the fund, and the first US$0.04 excess is paid to the
budget.
• If the price is more than US$0.10 above the reference price, then the first
two conditions apply to revenues up to the level of the reference price plus
US$0.10, and the revenues corresponding to the difference between the
reference price plus US$0.10 and the actual price are all paid into the
fund.
• If the price is below the reference price, the same rules apply
symmetrically for withdrawals from the fund (up to the point where it is
exhausted).
6.100 This set of rules for the operation of the fund has been criticized on two
grounds. First, the long-term forecast price was entirely backward looking and would not,
for example, take into account a sharp drop expected in the near future. Second, the
payments into or out of the fund took no account of the size of the fund itself. There was
no minimum balance for the fund to ensure its durability.
6.101 More recently, the forecasting exercise has been delegated to the copper
price panel, which consists of 14 individuals appointed by the minister of finance for one
year at a time and a balance of members related to the governing and opposition parties,
employees of mining companies, and financial analysts of the sector. Each panel member
estimates the long-term (10-year) price of copper and, at one of the two panel meetings
held during the budget season, submits a forecast that is published anonymously. The 2
extreme forecasts are discarded, and a simple average of the remaining 12 is used as a
reference price without attempting to reach a consensus view.
6.102 The fund, for which few details of value or performance are available, is
an account held in trust and managed by the central bank. The bank is obliged to obtain a
112 Experiences with Oil Funds: Institutional and Financial Aspects
specified return on assets (LIBOR less 0.125 percent), and does so as part of its normal
liquidity operations. The fund is overseen by a board, which includes representatives of
the national copper company.
6.103 Withdrawals from the fund, following the above rules, have been made to
cover budget expenditure other than debt repayment on several occasions. In 1988–89,
payments were made in the form of a subsidy to grape exporters, after a temporary ban
on exports to the United States, and to prepay debt that the treasury had contracted with
the central bank. In 1990, payments were made to cover the larger than planned imports
after an overexpansionary fiscal policy implemented during the run-up to an election.
Exceptions to the withdrawal rules have also occurred. A special transfer of US$460
million to the oil stabilization fund (created to cover the costs of imports of oil) was
made, but this was done following public debate and the issuance of a parliamentary law
to establish the conditions for repayment to the CCF, which has indeed since occurred. In
2001, the government even borrowed to replenish the fund. It has been estimated that the
size of the fund is of the order of US$2 billion.
6.104 Several attempts have been made to assess the effectiveness of the CCF in
helping to stabilize the government’s budget. Except in 1999, the government has been
able to avoid budget deficits in the face of continuing low copper prices. However, this is
due in part to the recent adoption of a structural budget balance fiscal rule that takes
copper revenues as one of the ingredients, but also plans for other variable factors. In
addition, the importance of copper revenues to the budget has declined, so that it now
accounts for only 4 percent of the government’s budget. It appears that the stabilization
role of the fund has largely become redundant, so that it may transform itself into a de
facto savings fund.
Assessment
6.105 The CCF is an example of a pure stabilization fund, with clear rules
determining payments in and out, but with the possibility that parliament can override
these rules. The distinctive features of the rules are the mechanism for forecasting the
reference price, which is required especially if transfers are not to be determined by
parliamentary decisions, and the withdrawals rule, which is determined by a nonlinear
relationship between the reference and actual prices. The latter has the effect that only
large fluctuations from the reference price bring the fund fully into play, while small
deviations leave it untouched.
6.106 The payments into and out of the fund, being part of the budgetary
process, are known only ex post, because no accumulations or withdrawals are planned
for in the budget, which is based on the reference price itself. These, plus any special
allocations determined by parliament, ensure some transparency in the management of
the fund. However, the lack of statements about the fund’s assets reduces the
accountability to the citizenry and relies on the oversight committee, which does not
publish a report. The return on assets managed by the central bank is low, even allowing
for the fact that the CCF must remain fairly liquid to cope with unforeseen fluctuations in
copper prices.
Some Other Resource Funds 113
35
The English text of the 1999 version of the Law of the Investment Fund for Macroeconomic
Stabilization is given in appendix 8 (www.bcv.org.ve/ifms/ifmmslaw2.htm).
114 Experiences with Oil Funds: Institutional and Financial Aspects
established that received the value of a fixed volume of oil production (about 2 percent
during the late 1990s). The oil fund is used to finance investments in the oil sector.
6.116 Currently, the SGRF is used as a stabilization fund, where revenues are
paid in when the oil price exceeds a reference price. Withdrawals from the fund are
normally limited to an amount equal to the budget deficit, so that there is net
accumulation only when the budget deficit is less than the excess revenue plus
investment revenue. In addition, there are special procedures for further withdrawals. In
the recent past, Oman has persistently run a nonoil deficit, thus the fund has regularly
contributed to the budget.
6.117 There is little information on the magnitude of the fund, because there is
no annual report or Web site, and the government does not share information with the
public. The assets are largely held abroad, and there are monthly internal audits and
investment performance reviews, quarterly external audits, and six-monthly portfolio
reviews, none of which are published.
Assessment
6.118 Despite the not too distant prospect of severe depletion of oil resources,
the country appears to have concentrated on the stabilization aspects of the oil fund.
Given that Oman has persistently run a financial deficit, it could be possible that a long
period of low oil prices would considerably reduce the fund. The success of reentry into a
postoil economy will depend on whether government spending has laid out the conditions
necessary for the economy to diversify and become competitive in some sectors.
6.119 The complete lack of transparency of the fund makes it difficult for the
population to assess the long-term strategy being followed by the government, or the
success of the management of the fund’s resources.
placed only in foreign debt instruments from a government list of approved items.
Withdrawals from the fund will take place if the actual price falls below the benchmark
price (then US$20 a barrel), because the budget is prepared on the basis of this price. In
addition, once the fund has accumulated 500 billion rubles (Rub), it may be used to
finance certain strategic objectives. The ministry of finance had proposed a higher
threshold of 9 percent of GDP before non-stabilization withdrawals could occur, but in
the event, the lower threshold of about 3.8 percent of GDP was implemented.
6.122 The designers of the OSF had expected that it might take three to four
years before such disbursements would occur, but the steep rise in oil prices has already
taken the fund to more than Rub 1.46 trillion by November 2005 (which is almost equal
to the estimate of GDP for the year), so that calls for disbursement on a range of projects
are occurring (such as reducing the rate of VAT or granting development loans to
businesses) that could create risks of Dutch disease effects. Early plans for uses of the
fund’s revenues included paying back external debt and financing the pension deficit.
The cautious estimate of the oil reference price has in fact meant that the OSF has very
rapidly accumulated reserves, and this has put the government in a strong position to
stabilize budget revenues if and when oil prices turn down. Faced with the unexpected
developments in the world oil market, the authorities raised the benchmark price to
US$40 a barrel for the 2006 budget.
6.123 The OSF is held as a sub-account of the treasury at the central bank, and
the bank is responsible for investing these sums. Each month, the press publishes details
of the balance of the fund, transfers into it, and its uses. At present, the balance of the
fund is entirely invested in U.S. high-grade income securities. There is at present no
official dedicated source of information for the fund, and its investment performance is at
present not published. Also, if an external audit of the fund has been carried out, this has
not been made public.
Assessment
6.124 Russia chose a particularly fortuitous time to establish the OSF, just as the
world oil price rise started its rapid climb. This meant that its modest accumulation target
was achieved within one year, so that the country has some time to consider the long-
term use of the funds before they become essential for budget revenue stabilization. The
fund as yet does not conform to international best practice for transparency in terms of
information.
oil revenues in 1990–91 were down by two-thirds from before the war, and government
expenditure was 25 percent higher, thus resulting in a very substantial budget deficit.
However, by 1993, oil production and GDP had largely recovered. The deficits were met
out of the assets of the RFFG, although the exact amount drawn down has not been
published. Estimates range from between one-third to one-half of the then assets of the
fund. One result of this drawdown was that investment income declined, reducing the
ability of the fund to provide stabilization so that the economy became more vulnerable
to swings in the world oil price.
6.131 The lack of transparency concerning the fund in terms of its value,
portfolio performance, asset composition and diversification, and audits makes it difficult
to assess its potential benefits to the economy.
Assessment
6.132 Kuwait has very large oil revenues in relation to the size of the budget and
has also been able to run fiscal surpluses, so that the rule of depositing 10 percent of
revenues into the RFFG has been easier than it is in some other economies. The
accumulated saving of the RFFG was apparently valuable in providing the short-term
financing required by the heavy strain placed on the economy by the Gulf War.
6.133 The deliberate lack of transparency concerning the fund, in terms of
revenue and expenditure flows, assets held, and investment performance, has been
justified by the authorities in terms of preventing calls for the immediate spending of the
fund, with its likely consequences of further distorting the economy. However, this lack
of transparency, in a situation where all citizens have an interest in the management of
the economy, is not a model that is to be recommended, and indeed it may not be
sustainable under increasing pressure for accountability.
7
A Comparison of Oil Funds
Introduction
7.1 The preceding chapters have given details of individual oil funds, and this
chapter builds on that material to present a comparative picture of the funds and their
operations. The discussion of individual funds has highlighted their strengths and
weaknesses, so that a list of indicators is provided to allow cross-country comparisons of
some key aspects of performance and design.
7.2 To make a full evaluation of the success of the various funds in achieving
the objectives for the government, in terms of saving for the future as opposed to
immediate consumption while maintaining a healthy fiscal position, in providing
stabilization of government expenditures against fluctuations in revenues from oil due to
price and production variations, and in providing the maximum financial return subject to
an acceptable risk profile, extensive information would be required. However, only four
funds provide a full history of their performance, and for all but Alaska this is based on
only a few years’ experience (Alberta having changed its policies in the late 1990s).
Furthermore, to evaluate fiscal policy against the counterfactual of there being no oil
fund would require formal economic modeling beyond the scope of this study.
7.3 The objectives of this chapter are more modest. Certain features which
should lead to well designed and operating funds can be identified, and the experiences
of the 15 funds described in the study are categorized with respect to these indicators.
Again, the actual contribution of these indicators to the overall performance of a
particular fund cannot be quantified. For example, it is widely accepted that transparency
over a fund’s inflows, outflows and financial performance is desirable, but it is not
generally possible to evaluate whether the existence of mechanisms for ensuring such
transparency actually made any difference to the operation of the fund or overall fiscal
policy.
7.4 The chapter begins by providing some basic information on the size of the
oil funds, and their importance relative to the size of the economy. This is followed by a
comparative table of the financial performance of the four funds for which detailed
119
120 Experiences with Oil Funds: Institutional and Financial Aspects
information is published. Turning to the actual way in which the funds were created, are
operated, managed, and provide public information on their performance, some twenty
indicators are suggested. The fifteen funds are then described with respect to these
indicators. Each indicator is discussed with respect to the desirability or not that a fund
should adopt the practice referred to by the indicator.
7.5 At this stage of the experience of oil funds, and given the limited amount
of information publicly available, the study does not attempt to come to formal
evaluations of the general performance of each fund; nor does it attempt to suggest that
there are rigid codes of best practice that should be followed. The situations of each of
the countries studied are so different that the goals and constraints facing each country
have led to very different approaches to setting up and operating the funds. What the
study does provide is an insight into the approaches to good practice that need to be
considered in any particular case, and it points out where the failure to follow such
practices has led to a need to redesign the fund, or face unsuccessful outcomes from the
creation of the fund.
Table 7.1 Indicators of the Relation of the Oil Sector to the Economy, 2004
Oil
production/
GDP per
Production Proved capita Government
GDP per Oil
reserves oil revenues/
(1,000 capita (000 exports/tot
R/P
barrels a (billion (current barrels per al exports total
day) barrels) (years) US$) day/$) (%) revenue
Alaska 1,086 4.45 11 51,685 0.02 NA 42
Alberta 1,720 175.6 280 44,128 0.04 56 33
Azerbaijan 318 7.0 60 1,029 0.31 77 56
Chad 168 0.60 10 486 0.35 NA 58
Kazakhstan 1,295 39.6 83 2,724 0.48 55 42
Kuwait 2,424 99.0 112 16,974a 0.14 86 77
Norway 3,188 9.7 8 54,598 0.06 39 23
Oman 785 5.6 19 8,160a 0.10 76 73
RB of 2,980 77.2 71 4,184 0.71 83 46
Venezuela
Russia 9,285 72.3 21 4,078 2.28 41 NA
São Tomé 0 NA NA 388 NA NA NA
and
Príncipe
Timor- NA NA NA 366 NA NA NA
Leste
Not Applicable (NA).
a. In 2003.
Sources: various World Bank and IMF estimates, BP Statistical Review of World Energy.
7.8 Table 7.1 confirms that, for the group of countries that have established oil
funds, oil production is most important for the lower-income countries (Azerbaijan,
Chad, Kazakhstan). Countries with high ratios of oil production to GDP are likely to be
the most vulnerable to swings in the world oil price and have the most need of a
stabilization mechanism, whether it be through the formal operation of their oil fund or
prudent expenditure-planning decisions that allow for some smoothing against revenue
fluctuations. The reserves to production ratio, which is a static indicator of how much
saving is “below the ground,” suggests that Alberta, Azerbaijan, Kazakhstan, Kuwait,
and the República Bolivariana de Venezuela appear to be least in need of the savings
122 Experiences with Oil Funds: Institutional and Financial Aspects
aspect of an oil fund, but even these countries should have an intergenerational approach
to expenditure and saving decisions.
7.9 The 15 resource funds described here vary considerably with respect to
size and functions. In trying to evaluate the success of the various models and their
operation in different countries, it is necessary to return to the underlying purposes of the
funds—saving or stabilization. In practice, many funds combine both aspects, sometimes
in separate treasury accounts, and any stabilization fund is also likely to be a de facto
savings fund, because it must on average hold enough resources to withstand shocks to
the system. Therefore, judging performance by the size and use of the funds is unlikely to
be straightforward and is not attempted here.
7.11 The Norwegian fund appears to have been the most successful despite its
avoidance of real estate investments, which were highly successful in Alberta and
Alaska. Part of this superior average performance is attributable to the very rapid growth
of the fund in the last two years, when it was able to obtain a very good return on
investment; in the earlier part of the observed period, when all funds had poor
performance, the size of the Norwegian fund was much smaller.
7.12 Alaska and Norway were able to achieve excess returns versus their
benchmarks through active management. All funds experienced periods when returns
measured in the currency basket of the assets and measured in local currency diverged
somewhat.
7.13 The year-by-year performance of the different components of the
portfolios also indicated that in some years, a portfolio with a large equity component can
experience substantial negative returns. This is an important issue for citizens of the
country, who need to understand how funds take a long view of asset markets to achieve
higher returns without too much risk.
A Comparison of Oil Funds 123
evaluation of the status of certain indicators. The indicators are grouped under these four
aspects (A–D) covering: the establishment of the fund; transfers into and out of the fund;
the management of the fund; and the governance of the fund.
Timor-Leste
Kazakhstan
Papua New
Azerbaijan
Príncipe
Norway
Alberta
Guinea
Kuwait
Alaska
Russia
Nauru
Oman
Chad
Chile
A. Establishment of fund
1.Prior information campaign Y Y Y Y N N N N N N Y Y N N N
a
2.Legal method of establishment C A D D D A A A D A A A A A A
b
3.Purpose of the fund F F B B B F B T T T F F T F T
c
4.Status of the fund A A A M M M M A M M M M M M M
B. Flows into and out of fund
1.Determination of net payments to fundd R R D na R D D R D D R R R D D
2.Formula for price calculation N N N na Y N N Y Y Y Y Y Y N Y
C. Management and investment
1. Special fund strategy body Y Y Y na Y Y N ? N N Y Y N ? N
2. Investment advisers Y Y N na N ? N ? N N Y Y N ? N
125
126
Oil Funds Mineral Funds
Timor-Leste
Papua New
Azerbaijan
Príncipe
Norway
Alberta
Guinea
Kuwait
Alaska
Russia
Nauru
Oman
Chad
Chile
2. Annual report published Y Y Y na N N Y N N N Y Y N N Y
3. Performance published Y Y Y na N N Y N N N Y Y N N Y
4. Audit Publisher Y Y Y na N N Y N N N Y Y N N N
5. Web site for fund performance Y Y Y na N N Y N N N Y Y N N Y
Notes to table.
Y = yes; N = no; na = either not applicable or no decision yet.
a. C = constitutional amendment; A = parliamentary act; D = presidential decree.
b. T = stabilization fund; F = savings fund; B = savings and stabilization fund.
c. A = autonomous body; M = within ministry of finance or other ministry or central bank.
d.R = rules-based; D = discretionary
A Comparison of Oil Funds 127
7.26 In general, where the fund is to be used for stabilization, or where all
revenues are first paid to the fund, with payments out being made to treasury, then it is
likely to be most effective to keep the fund within the ministry of finance (treasury).
oil revenues can meet, the law can refer all proposed withdrawals, in
excess of what can be afforded to keep estimated permanent income
constant, to parliament for consideration and approval. This requires a
deliberation on the balance between the long-term and short-term needs of
the country.
• Budget needs are taken as dominant. In some countries, there is no formal
reference in the foundation act to maintaining the real value of the fund
constant (permanent income), so that parliament or the executive are
unfettered in their decision on how much to withdraw from the oil fund
(Norway). The accumulation of the fund is then left to parliament or the
executive to ensure that the fund accumulates an appropriate sum for its
long-term purposes.
7.30 The existence of formal rules for payments into and out of the fund may
facilitate public scrutiny to ensure that the laws are being obeyed. Discretionary systems,
especially where the decision is to be made by parliament through the budgetary process,
can work well. The danger of the discretionary process is that, in the presence of liquidity
constraints, a parliament where there is a solid majority, particularly before an election,
may decide to tap the resources of the fund to enhance the chance of success for the
incumbent government.
2. The existence of a formula to determine the reference price
7.31 In systems where the fund is designed to maintain real value of its assets
intact, or to help stabilize current government revenues, the calculation of future oil
revenues becomes very important. The procedures for making this calculation are highly
dependent on forecasts of the oil price. A formula to determine the reference price (Chile,
São Tomé and Príncipe) is advisable in that it avoids arbitrary decisions designed to favor
the current spending plans of the parliamentary majority.
5. Use of benchmarks
7.42 Some funds (Alaska, Alberta, Chile, Norway) identify benchmark indexes
for each class of assets and, where applicable, each active management mandate. The
actual return for each asset class is then compared to the benchmark for that class. Target
allocations between asset classes are also specified, so that the overall return depends
partly on the shares actually held in the different asset classes, as well as the asset
selection within each class. The excess (or deficit) over the return on the benchmark
portfolio is then attributed to the active management of the portfolio.
6. Domestic investment policy
7.43 One of the important decisions about asset allocation is that relating to the
geographical location of the assets. Some funds (Norway, Timor-Leste, São Tomé and
Príncipe) from the beginning held almost all assets overseas; others (Alaska, Alberta,
Chile, and Papua New Guinea) were initially invested entirely domestically.
7.44 Small economies, especially with undeveloped asset markets, can find it
difficult to domestically absorb the large sums that could accrue in the oil fund, and much
better risk-adjusted performance may be obtainable from overseas assets. In other cases,
the injection of finance into the economy might provide a stimulus to the domestic
economy, as was the hope during the first period of the AHSTF, when investment in a
wide range of domestic activities was undertaken.
7.45 Domestic investment policies should take into consideration the need for
sterilizing the economy against exchange rate appreciation by largely investing abroad.
7. Equity investment policy
7.46 Certain funds, especially in their early days, limit assets that can be held to
high-grade income securities (Alaska, Azerbaijan, Chile, São Tomé and Príncipe, Timor-
Leste), and some limit the maximum duration of these securities (Norway, Timor-Leste).
This is one way of limiting the overall investment risk. The liquidity profile of the fund is
also an important consideration, because it should match the expected withdrawals
profile (Azerbaijan, São Tomé and Príncipe). More mature funds have permitted
investment in equities (Alaska, Alberta, Norway).
8. Real estate
7.47 Some funds permit the holding of real estate (Alaska, Alberta), usually in
the home country, and others explicitly ban it (Azerbaijan). In the cases of Alaska and
Alberta, this turned out to be one of the strongest parts of the portfolio, with annual rates
of return of more than 10 percent. However, it is also one of the most difficult to manage,
as the experience of Nauru suggests, and is particularly inappropriate for domestic real
estate in developing countries, where markets may be thin and highly volatile. An
additional consideration is the need to ensure that the investment policy maintains its
return on investment objectives and is not subverted toward public investments that do
not provide an adequate return.
136 Experiences with Oil Funds: Institutional and Financial Aspects
9. Geographical spread
7.48 In addition to the considerations made under the heading of domestic
investment policy above, the diversification among various nondomestic investments is
important. Once the decision to permit overseas investment has been made, geographical
split has also been mandated in some cases. Two principles of geographical coverage
have been considered. The predominant approach is to assign market shares on a basis
related to market capitalization, so that the United States, the European Union, and Japan
are assigned most of the assets. An alternative approach is to match the geographical
coverage of the country’s trade to face the same exchange rate risk on the portfolio as on
trade. However, as in the case of Norway, trade patterns may be so different from
international market capitalization as to make such a scheme very restrictive.
whole of the value of “above the ground” savings and the returns from them. In the case
of Norway, details are also given of the value of all individual stock holdings. However,
not every country publishes annual reports (Kuwait, Oman) partly on the grounds that
their revelation would increase pressures for current spending. Some countries do not
publish a full annual report but do publish occasional statements about the total value of
the fund and additions to the Fund (Kazakhstan, Russia).
3. Publication of the fund’s performance
7.54 To evaluate the performance of the fund managers in achieving target
returns, it is important that the annual reports include sufficient details of performance
and classes of assets held. This enables observers to judge whether the fund may be
adopting a very cautious approach (Chile) or a very risky approach (Nauru). The use of
published benchmarks, against which performance of each class of assets is to be judged,
provides information on the degree of success of the fund managers and the gains from
active management (Norway).
4. Publication of audit
7.55 All funds are likely to have an internal mechanism for their audit through
the government’s auditor (Alberta, Norway), but for the most secretive funds, even this
aspect is not made public. The auditors’ report certifies the accuracy of the returns,
portfolio valuation, and transactions presented in the annual report of the fund (whether
or not this report is made public). The use of benchmark portfolios and the requirement
for performance monitoring extends the need for audit to a comparison of actual returns
with those expected from a benchmark portfolio. To give more confidence to the auditing
process, a separate external audit should be carried out and published (Alaska,
Azerbaijan). In the case of Norway, an entirely separate external performance audit has
also been carried out and published for the last two years, which checks the internal audit
of performance, as well as the actual performance against the benchmark.
5. Use of Web sites
7.56 The publication of annual reports and audit reports is an essential tool to
ensure that good use is being made of the fund’s resources. Before the advent of the
Internet, reports to parliament were the sole source of information, and these could be
difficult for the public at large to obtain. The creation of a Web site on which all reports,
as well as related news items about the fund, are regularly published is a powerful
mechanism for keeping a wide range of parties informed about the progress of the fund.
Appendix 1
The Alberta Heritage Savings Trust Fund
1.A: The Alberta Heritage Savings Trust Fund Act (1976)
WHEREAS substantial revenues are being received by the Province from the sale of non-renewable resources owned
by the people of Alberta; and
WHEREAS there is a limited supply of non-renewable resources and therefore revenues from the sale of these
resources will ultimately be reduced; and
WHEREAS it would be improvident to spend all such revenues as they are received; and
WHEREAS the Legislature of Alberta considers it appropriate that a substantial portion of those revenues be set aside
and invested for the benefit of the people of Alberta in future years:
THEREFORE HER MAJESTY, by and with the advice and consent of the Legislative Assembly of Alberta, enacts as
follows:
1. In this Act,
(a) “Investment Committee” means the Heritage Savings Trust Fund Investment Committee established
under section 3;
(b) “non-renewable resource revenue” means
(i) moneys received by the Crown pursuant to agreements as defined in the Mines and
Minerals Act,
(ii) moneys received by the Crown as bonuses to acquire agreements as defined in the Mines
and Minerals Act,
(iii) moneys received under and agreement between the Crown in the right of Alberta and the
holder of a bituminous sands lease under which the crown agrees to accept money
payments in lieu of royalty under the lease;
139
140 Experiences with Oil Funds: Institutional and Financial Aspects
(c) “Special Act” with reference to any fiscal year after the 1976-77 fiscal year means an Act of the
Legislature authorizing the transfer from the General Revenue Fund to the Trust Fund of 30 per cent of
the non-renewable resource revenue received in that fiscal year;
(d) “Trust Fund”: means the Alberta Heritage Savings Trust Fund established under section 2.
2. (1) There is hereby established a fund to be known as the “Alberta Heritage Savings Trust Fund”.
(2) The Provincial Treasurer shall hold and administer the Trust Fund in accordance with this Act.
(3) The Provincial Treasurer shall establish and maintain a separate accounting record of the Trust Fund.
3. (1) There is hereby established a committee called the “Heritage Savings Trust Fund Investment Committee”
consisting of all members of the Executive Council.
(2) The Investment Committee shall designate one of its members as chairman and another as vice-chairman.
(3) The Lieutenant Governor in council may make rules governing the calling of meetings of the Investment
Committee, the quorum required at its meetings and, generally, the conduct of the Committee’s business and
affairs.
4. (1) As soon as practicable after the commencement of this Act, there shall be transferred from the General
Revenue fund to the Trust Fund $1,500,000,000.
(2) The amount transferred pursuant to subsection (1) may be transferred in cash or other assets, but where
assets other than cash are to be transferred, the Investment Committee shall, before any transfer is made,
approve
(a) the assets to be transferred;
(b) the manner in which and the time or times at which the transfer is to be made, and
(c) the valuation of the assets or the method by which the assets are to be valued,
and may impose such conditions relating to the transfer as the Investment Committee considers necessary.
(3) Where the Investment Committee is of the opinion that any asset to be transferred under subsection (1)
(a) will yield a reasonable return or profit to the Trust Fund, and
(b) will tend to strengthen and diversify the economy of Alberta,
the Investment Committee may direct that the asset upon its transfer shall form part of the Alberta
Investment Division of the Trust Fund as if the asset were the subject of an investment made pursuant to
section 6, subsection (1), clause (c).
(4) Assets other than cash that are transferred pursuant to subsection (1) and that do not form part of the
Alberta Investment Division of the Trust Fund by virtue of a direction under subsection (3) shall consist only
of assets within the classes enumerated in section 9, subsection (1) and upon being transferred shall be
deemed to be investments made under that section.
(5) The income of the Trust Fund accrues to and forms part of the Trust Fund.
(b) 30 per cent of the non-renewable resource revenue received in the 1977-78 fiscal year shall
be transferred from the General Revenue Fund to the Trust Fund in accordance with this
Act but only if the transfer is authorized by a Special Act enacted in that fiscal year;
(c) 30 percent of the non-renewable resource revenue received in the 1978-79 fiscal year and in
each fiscal year thereafter shall be transferred from the General Revenue Fund to the Trust
Fund in accordance with this Act but only if, in the case of each fiscal year, the transfer is
authorized by a Special Act enacted in the preceding fiscal year.
(2) The title of a Special Act shall be “The Alberta Heritage Savings Trust Fund Special Appropriation
Act” followed by a reference to the fiscal year to which it relates.
(3) The President of the Executive Council or a member of the Executive Council designated by him for the
purpose shall, with the leave of the Assembly,
(a) introduce during the 1977-78 fiscal year a Bill for a Special Act relating to the 1977-78
fiscal year, and
(b) introduce during the 1977-78 fiscal year and during each fiscal year thereafter a Bill for a
Special Act relating to the next succeeding fiscal year.
(4) The Provincial treasurer shall, with respect to each month in
(a) the 1976-77 fiscal year, and
(b) each succeeding fiscal year in respect of which a Special Act is enacted,
transfer 30 per cent of the non-renewable resource revenue received in the month from the General
Revenue Fund to the Trust Fund as soon as practicable after the end of the month in which it is received.
(5) Notwithstanding subsection (4), the Provincial Treasurer may, with respect to any month to which that
subsection applies, estimate 30 percent of the non-renewable resource revenue to be received in that
month and transfer that sum from the General Revenue Fund to the Trust Fund during that month or as
soon as practicable after the end of the month in respect of which the estimate is made.
(6) With respect to the 1976-77 fiscal year and each succeeding fiscal year in respect of which a Special
Act is enacted, the Provincial Treasurer, depending upon whether the total of the sums transferred
pursuant to subsections (4) and (5) is greater or less than 30 percent of the non-renewable resource
revenue received in that fiscal year as shown in the public accounts for that fiscal year, shall
(a) transfer moneys from the General Revenue Fund to the Trust Fund, or
(b) transfer moneys from the Trust Fund to the General Revenue Fund,
so that the amount of the non-renewable resource revenue in the Trust Fund for that fiscal year is equal
to 30 percent of the non-renewable resource revenue received in that fiscal year.
(7) No interest is payable with respect to any money transferred pursuant to this section to or from the
General Revenue fund or to or from the Trust Fund.
6. (1) The assets of the Trust Fund shall be used for the following purposes:
(a) the making of investments in projects which will provide long term economic or social
benefits to the people of Alberta but which will not by their nature yield a return to the
Trust Fund;
(b) the making of investments by way of loans to
(i) the Crown in right of Canada, or
(ii) the Crown in right of any other province of Canada, or
(iii) any other person if the repayment of the loan and the payment of interest thereon by
that person is guaranteed by the Crown in right of Canada or the crown in right of any
other province of Canada;
(c) the making of investments which, in the opinion of the Investment Committee or in the
opinion of the Legislative Assembly as expressed in a resolution of the Assembly,
(i) will yield a reasonable return or profit to the Trust Fund, and
(ii) will tend to strengthen and diversity the economy of Alberta.
(2) Investments referred to in subsection (1), clause (a)
(a) shall only be made if the moneys are first appropriated from the Trust Fund by an Act of
the Legislature specifically for a purpose described in subsection (1), clause (a),
142 Experiences with Oil Funds: Institutional and Financial Aspects
(b) shall not exceed 20 per cent of the assets of the Trust Fund, and
(c) shall form the Capital Projects Division of the Trust Fund.
(3) Investments referred to in subsection (1), clause (b)
(a) shall be made or approved by the Investment Committee in accordance with the directions
contained in any resolution of the Legislative Assembly,
(b) in the absence of any such directions, shall be made only with the approval of the
Investment Committee,
(c) shall not exceed 15 per cent of the assets of the Trust Fund, and
(d) shall form the Canada Investment Division of the Trust Fund.
(4) Investments referred to in subsection (1), clause (c)
(a) shall be made or approved by the Investment Committee in accordance with the directions
contained in any resolution of the Legislative Assembly,
(b) in the absence of any such directions, shall be made with the approval of the Investment
Committee, and
(c) shall form the Alberta Investment Division of the Fund.
(5) For the purposes of this section,
(a) investments in the Capital Projects Division shall be deemed to be assets of the Trust Fund
with a value equal to the amounts expended pursuant to Acts of the Legislature referred to
in subsection (2), clause (a);
(b) investments in the Canada Investment Division and the Alberta Investment Division and all
other assets of the Trust Fund shall be valued at book value;
(c) the percentage limitations referred to in subsection (2), clause (b) and subsection (3), clause
(b) shall be determined at the end of each fiscal year.
7. (1) Where any investment is made under section 6 with the approval of the Investment Committee, no
disposition shall be made of that investment except with the approval of the Investment Committee.
(2) Where a resolution of the Legislative Assembly directs the making of any investment pursuant to
section 6, no disposition shall be made of that investment except pursuant to a resolution of the
Legislative Assembly.
(3) Where a resolution of the Legislative Assembly directs the disposition of any investment then,
notwithstanding subsection (1), the investment shall be disposed of in accordance with the directions
contained in any resolution of the Legislative Assembly.
8. Any approval given by the Investment Committee under section 6 or 7 may be made subject to such terms
and conditions as the Committee considers necessary.
9. (1) Notwithstanding section 6, where any moneys in the Trust Fund have not been or are not being invested
pursuant to that section, the Provincial Treasurer may invest or may re-invest those moneys in any or all of
the following:
(a) the bonds, debentures or other evidences of indebtedness of, or guaranteed as to the
repayment of principal and interest by, the government of Canada, the government of any
province of Canada or any municipal corporation in Canada;
(b) the bonds, debentures or other evidences of indebtedness of or guaranteed as to the repayment
of principal and interest by the government of a country other than Canada;
(c) the bonds, debentures or other evidences of indebtedness of any agent of the Crown in right of
Alberta;
(d) certificates of deposit, deposit receipts or other evidences of indebtedness given by a chartered
bank or treasury branch in consideration of a deposit or deposits made with the bank or
treasury branch;
(e) certificates of deposit, deposit receipts or other evidences of indebtedness which are
unconditionally guaranteed by a chartered bank;
Appendix 1: The Alberta Heritage Savings Trust Fund 143
(f) the bonds, debentures or other evidences of indebtedness of or guaranteed by any corporation,
if those bonds, debentures or other evidences of indebtedness are authorized investments
under section 63, subsection (1) of the Canadian and British Insurance Companies Act;
(g) mortgages or hypothecs of real estate or leaseholds in Canada if the amount paid for the
mortgage or hypothec together with the amount of indebtedness under any mortgage or
hypothec on the real estate or leasehold ranking equally with or superior to the mortgage or
hypothec in which the investment is made does not exceed three-quarters of the value of the
real estate or leasehold covered thereby;
(h) mortgages or hypothecs of real estate or leaseholds in Canada notwithstanding that the
mortgage or hypothec exceeds the amount authorized under clause (g) if the excess is
guaranteed or insured by, or through and agency of, the Government of Canada or a province
of Canada, or by an insurance company approved by the Treasury Board.
(2) The Provincial Treasurer may dispose of any investments made or deemed to be made under this
section.
(3) Notwithstanding section 28.4, subsection (1) of The Financial Administration Act, the Provincial
Treasurer shall transfer moneys from the Trust Fund to the Consolidated Cash Investment Trust Fund
only where the moneys have not been invested or re-invested under subsection (1) or where the moneys
have not been invested pursuant to section 6.
10. (1) Where any costs, expenses or other payments are directly attributable to the administration of the Trust
Fund, the Provincial Treasurer may charge the cost, expense or payment to the Trust Fund.
(2) After the end of each fiscal year the Investment Committee shall
(a) estimate an amount consisting of the fees, wages, salaries, costs, expenses or other payments
incurred in connection with the administration of the Trust Fund and paid out of the General
Revenue Fund in the preceding year, and
(b) authorize the Provincial Treasurer to transfer the amount estimated under clause (a) from the
Trust Fund to the General Revenue Fund.
11. (1) The Provincial Treasurer shall, as soon as practicable after the end of each quarter of the 1977-78 and
succeeding fiscal years, prepare a report summarizing the investments made under section 9 and listing the
investments made under section 6 during the preceding quarter.
(2) When a quarterly report is prepared under subsection (1), the Provincial Treasurer shall forthwith furnish
copies of the report to all members of the Legislative Assembly and to the Clerk of the Legislative Assembly
and upon doing so shall make the report public.
12. (1) The Provincial Auditor shall from time to time and at least once each year audit the accounts and
financial transactions of the Trust Fund.
(2) The Provincial Treasurer shall, as soon as practicable after the end of each fiscal year, prepare a report
summarizing the operation of the Trust Fund during the preceding fiscal year and containing a financial
statement, audited by the Provincial Auditor, showing
(a) transfers of cash and other assets to the Trust Fund during the preceding fiscal year,
(b) payments made from and income accrued to the Trust Fund for the preceding fiscal year,
and
144 Experiences with Oil Funds: Institutional and Financial Aspects
(c) the total moneys expended under Acts of the Legislature referred to in section 6,
subsection (2), clause (a) in respect of investments in the Capital Projects Division of the
Trust Fund.
(3) When an annual report is prepared under subsection (2), the Provincial Treasurer shall forthwith furnish
copies of it to all members of the Legislative assembly and to the clerk of the Legislative Assembly and upon
doing so shall make the report public.
13. (1) There is hereby established a select standing committee of the Legislative Assembly called the “Select
Standing Committee on The Alberta Heritage Savings Trust Fund Act” consisting of 15 members.
(2) The members of the Select Standing Committee shall be appointed at the commencement of each session
in the same way that members are appointed to other select standing committees of the Legislative
Assembly.
(3) When a copy of the annual report is furnished to the Clerk of the Legislative Assembly pursuant to
section 12, subsection (3) the annual report shall be deemed to be referred to the Select Standing Committee
for review and a report concerning the investments of the Trust Fund which may contain any
recommendations of the Committee concerning these investments.
(4) Where a motion is made in the Legislative Assembly for second reading of a Bill for a Special Act
relating to the 1978-79 or any succeeding fiscal year, then, unless the Assembly by resolution otherwise
directs, the debate on the motion shall be proceeded with only if the report of the Select Standing Committee
relating to the preceding fiscal year has been tabled in the Assembly.
(5) The Select Standing Committee may, without leave of the Assembly, sit during any period when the
Assembly is adjourned or after prorogation of a session of the Legislature.
(a) as to section 16.1 by adding the word “or” at the end of clause (e) and by adding the following clauses
after clause (e):
(f) between accounts in the General Revenue Fund and the Alberta Heritage Savings Trust Fund, or
(g) between accounts in the Consolidated Cash Investment Trust Fund and the Alberta Heritage
Savings Trust Fund, or
(h) for the purpose of making investments under section 9 of The Alberta Heritage Savings Trust
Fund Act,
40.2 The Provincial Treasurer shall, upon the direction of the Treasury Board, advance from the
General Revenue Fund to the Alberta Heritage Savings Trust Fund such sums as may be required
upon such terms and conditions as the Treasury Board may impose.
Appendix 1: The Alberta Heritage Savings Trust Fund 145
(c) as to item 1 of the schedule, by adding to the list of designated funds of the Provincial Treasurer the
following:
15. This Act comes into force on the day upon which it is assented to.
THEREFORE HER MAJESTY, by and with the advice and consent of the Legislative Assembly of Alberta, enacts as
follows:
1 In this Act,
(b) "Heritage Fund" means the Alberta Heritage Savings Trust Fund referred to in section 2;
(c) "mineral agreement" means an agreement as defined in the Mines and Minerals Act;
(i) money received by the Crown under a mineral agreement or a contract under
section 9 of the Mines and Minerals Act or under a reservation of royalty in
letters patent conveying title to a mineral,
(ii) money received by the Crown from or in connection with the disposition of
the Crown's royalty share of a mineral,
(iii) fees paid to the Crown in connection with the issuance of a mineral
agreement,
and
(v) money received by the Crown pursuant to a contract under which the Crown
agrees to accept that money instead of royalty otherwise payable under one
or more leases of oil sands rights issued under the Mines and Minerals Act;
146 Experiences with Oil Funds: Institutional and Financial Aspects
(e) "Special Act" with reference to any fiscal year means an Act of the Legislature authorizing the
transfer from the General Revenue Fund to the Heritage Fund of a percentage of the non-
renewable resource revenue received in that fiscal year;
(f) "Standing Committee" means the Standing Committee established under section 6;
2 (1) There is hereby continued the Alberta Heritage Savings Trust Fund established under the Alberta
Heritage Savings Trust Fund Act, RSA 1980 cA-27.
(2) The Provincial Treasurer shall hold, manage, invest and dispose of the assets of the Heritage Fund in
accordance with this Act.
(3) The Provincial Treasurer shall establish and maintain a separate accounting record of the Heritage
Fund.
3 (1) The investments and other assets of the Heritage Fund shall be contained
(2) Investments made under the endowment portfolio must be made with the objective of maximizing
long-term financial returns.
(3) Investments made under the transition portfolio must be made with the objective of supporting the
Government's short-term to medium-term income needs as reflected in the Government's consolidated
fiscal plan.
(4) Subject to the regulations, when making investments the Provincial Treasurer shall adhere to
investment and lending policies, standards and procedures that a reasonable and prudent person would
apply in respect of a portfolio of investments to avoid undue risk of loss and obtain a reasonable return that
will enable the endowment portfolio and the transition portfolio to meet their respective objectives.
4 (1) The Provincial Treasurer may enter into agreements providing for
Act, and
(b) the delivery to the Provincial Treasurer of collateral consisting of securities or classes of
securities or of letters of credit.
(2) The Provincial Treasurer may enter into agreements or engage in other activities of a financial nature
respecting investment under this Act, including, without limiting the generality of the foregoing, exchange
agreements, futures agreements, option agreements, rate agreements, any other financial agreements or
any combination of the agreements or activities referred to in this subsection.
Appendix 1: The Alberta Heritage Savings Trust Fund 147
5 The endowment portfolio and the transition portfolio are designated as depositors in the Consolidated Cash
Investment Trust Fund under the Financial Administration Act.
6 (1) There is hereby established a standing committee of the Legislative Assembly called the "Standing
Committee on the Alberta Heritage Savings Trust Fund" consisting of 9 members of the Legislative
Assembly.
(2) The membership of the Standing Committee shall include 3 members of the Legislative Assembly
who are not members of the governing party, but if there is
(a) an insufficient number of non-government members to fill the 3 positions on the Standing
Committee, or
(b) an insufficient number of non-government members who are willing to fill the 3 positions
on the Standing Committee,
the resulting vacant positions on the Standing Committee may be filled by members of the Legislative
Assembly who are members of the governing party.
(3) The members of the Standing Committee shall be appointed at the commencement of each session in
the same way that members are appointed to other standing committees of the Legislative Assembly.
(a) to review and approve annually the business plan for the Heritage Fund;
(b) to receive and review quarterly reports on the operation and results of the operation of the
Heritage Fund;
(d) to review after each fiscal year end the performance of the Heritage Fund and report to the
Legislature as to whether the mission of the Heritage Fund is being fulfilled;
(e) to hold public meetings with Albertans on the investment activities and results of the
Heritage Fund.
(5) The Standing Committee may, without leave of the Assembly, sit during any period when the
Assembly is sitting or when it is adjourned or after prorogation of a session of the Legislature.
7 (1) The Provincial Treasurer shall for each fiscal year prepare and provide to the Treasury Board a
business plan for the Heritage Fund.
(2) Once the Treasury Board has advised the Provincial Treasurer that the Treasury Board has approved
the business plan, the Provincial Treasurer shall provide a copy of the approved business plan to the
Standing Committee for the Standing Committee's approval.
148 Experiences with Oil Funds: Institutional and Financial Aspects
(3) On the Standing Committee's giving its approval of the business plan, the Provincial Treasurer shall
incorporate the business plan into the business plan prepared by the Provincial Treasurer under section 13
of the Government Accountability Act.
8 (1) The income of the Heritage Fund accrues to and forms part of the Heritage Fund.
(2) The net income of the Heritage Fund less the amount allocated to the Heritage Fund under section 11
shall be transferred by the Provincial Treasurer from the Heritage Fund to the General Revenue Fund
annually in a manner determined by the Provincial Treasurer.
9 (1) A percentage of the non-renewable resource revenue received in each fiscal year shall be transferred
from the General Revenue Fund to the Heritage Fund in accordance with this Act, but only if the transfer
is authorized by a Special Act.
(2) The title of a Special Act shall be the "Alberta Heritage Savings Trust Fund Special Appropriation
Act" followed by a reference to the fiscal year to which it relates.
(3) The President of the Executive Council or a member of the Executive Council designated by the
President of the Executive Council for the purpose shall, with leave of the Assembly, introduce a Bill for a
Special Act in respect of each fiscal year.
(4) The Provincial Treasurer shall, with respect to each fiscal year in respect of which a Special Act is
enacted, transfer the percentage authorized in accordance with subsection (1) of the non-renewable
resource revenue received from the General Revenue Fund to the Heritage Fund in a manner determined
by the Provincial Treasurer.
10 (1) In this section, "previous Act" means the Alberta Heritage Savings Trust Fund Act, RSA 1980 cA-27.
(2) Notwithstanding section 14 of the Financial Administration Act, money invested pursuant to section
6(1)(a) of the previous Act that is recovered through the disposition of assets owned by the Crown shall be
included in and forms part of the Heritage Fund.
11 (1) Subject to subsections (2) and (3), for the fiscal year 1999-2000 and subsequent fiscal years, the
Provincial Treasurer shall retain from the income of the Heritage Fund and allocate to the endowment
portfolio as soon as convenient after the end of each fiscal year an amount equal to the value of the total
equity of the Heritage Fund as recorded in the financial statements of the Heritage Fund for March 31 of
the fiscal year multiplied by the percentage increase, if any, for that fiscal year in the Canadian gross
domestic product price index specified by the Provincial Treasurer.
(2) If the income of the Heritage Fund in a fiscal year is less than that required to be allocated to the
endowment portfolio under subsection (1), the Provincial Treasurer shall allocate that income, if any, to
the endowment portfolio as soon as convenient after the end of that fiscal year.
Appendix 1: The Alberta Heritage Savings Trust Fund 149
(3) For the purposes of subsection (1), if the percentage increase in the gross domestic product price index
specified by the Provincial Treasurer is a negative number, that negative number shall be treated as if it
were zero.
(4) Notwithstanding subsections (1), (2) and (3), until the accumulated debt is eliminated in accordance
with the Fiscal Responsibility Act, the Provincial Treasurer is not required to retain the amounts required
under subsections (1), (2) and (3), but may retain any amounts that the Provincial Treasurer considers
advisable.
12 (1) The Lieutenant Governor in Council shall in each fiscal year direct the Provincial Treasurer to allocate
assets with a book value of $1 200 000 000, or any greater amount that is authorized by the Lieutenant
Governor in Council, from the transition portfolio to the endowment portfolio.
(2) Notwithstanding subsection (1), by December 31, 2005 all the assets of the Heritage Fund that remain
allocated to the transition portfolio shall be removed from the transition portfolio and allocated to the
endowment portfolio.
13 The Provincial Treasurer may charge a cost, expense or other payment to the Heritage Fund if in the
opinion of the Provincial Treasurer the cost, expense or other payment was incurred or paid in respect of
the Heritage Fund.
15 (1) The Provincial Treasurer shall, as soon as practicable after the end of each of the first 3 quarters of
every fiscal year, prepare and provide to the Standing Committee a report on the activities of the Heritage
Fund and financial statements for the preceding quarter.
(2) When the Standing Committee is provided with a quarterly report under subsection (1), the Standing
Committee shall furnish copies of the report to all members of the Legislative Assembly and to the Clerk
of the Legislative Assembly within 2 months after the conclusion of the quarter for which the quarterly
report was prepared and on doing so shall make the report public.
16 (1) The Provincial Treasurer shall, as soon as practicable after the end of each fiscal year, prepare and
provide to the Standing Committee an annual report of the Heritage Fund, including a financial statement
audited by the Auditor General.
(2) Once the Standing Committee has approved the annual report provided to the Standing Committee
under subsection (1), the Standing Committee shall, on or before June 30 following the conclusion of the
fiscal year for which the annual report was made, furnish copies of it to all members of the Legislative
Assembly and to the Clerk of the Legislative Assembly and on doing so shall make the report public.
150 Experiences with Oil Funds: Institutional and Financial Aspects
17 The Lieutenant Governor in Council may make regulations respecting the investments that may be made
under this Act.
Appendix 2
Alaska’s Constitution and Law Pertaining
to the Permanent Fund
ALASKA CONSTITUTION Article IX, Section 15
At least twenty-five percent of all mineral lease rentals, royalties, royalty sale proceeds, federal mineral
revenue sharing payments and bonuses received by the State shall be placed in a permanent fund, the
principal of which shall be used only for those income-producing investments specifically designated by
law as eligible for permanent fund investments. All income from the permanent fund shall be deposited in
the general fund unless otherwise provided by law [Effective February 21, 1977].
(a) Under art. IX, sec. 15, of the state constitution, there is established as a separate fund the Alaska
permanent fund. The Alaska permanent fund consists of
(1) 25 percent of all mineral lease rentals, royalties, royalty sale proceeds, net profit shares under AS
38.05.180 (f) and (g), 25 percent of federal mineral revenue sharing payments received by the state from
mineral leases, and 25 percent of all bonuses received by the state from mineral leases; and
(2) any other money appropriated to or otherwise allocated by law or former law to the Alaska permanent
fund.
151
152 Experiences with Oil Funds: Institutional and Financial Aspects
(b) Payments due the Alaska permanent fund under (a) of this section shall be made to the fund within
three banking days after the day the amount due to the fund reaches at least $3,000,000 and at least once
each month.
(c) The Alaska Permanent Fund shall be managed by the Alaska Permanent Fund Corporation established
in this chapter.
The people of the state, by constitutional amendment, have required the placement of at least 25 percent of
all mineral lease rentals, royalties, royalty sale proceeds, and federal mineral revenue sharing payments and
bonuses received by the state into a permanent fund. The legislature finds with respect to the fund that
the fund should provide a means of conserving a portion of the state's revenue from mineral resources to
benefit all generations of Alaskans;
the fund's goal should be to maintain safety of principal while maximizing total return;
the fund should be used as a savings device managed to allow the maximum use of disposable income from
the fund for purposes designated by law.
It is the purpose of AS 37.13.010 - 37.13.190 to provide a mechanism for the management and investment
of those fund assets by the Alaska Permanent Fund Corporation in a manner consistent with the findings in
AS 37.13.020.
There is established the Alaska Permanent Fund Corporation. The corporation is a public corporation and
government instrumentality in the Department of Revenue managed by the board of trustees. The purpose
of the corporation is to manage and invest the assets of the permanent fund and other funds designated by
law in accordance with AS 37.13.010 - 37.13.190.
Appendix 2: Alaska’s Constitution and Law Pertaining to the Permanent Fund 153
(a) The Board of Trustees of the Alaska Permanent Fund Corporation consists of six members appointed
by the governor. Two of the members must be heads of principal departments of state government, one of
whom shall be the commissioner of revenue. Four members shall be appointed by the governor from the
public and may not hold any other state or federal office, position or employment, either elective or
appointive, except as a member of the armed forces of either the United States or of this state.
(b) The four public members of the board must have recognized competence and wide experience in
finance, investments, or other business management-related fields.
(c) The board shall annually elect a chairman from among its members.
The public members of the board shall be appointed for terms of four years, and they may be reappointed.
The terms of the public members shall be staggered so that no more than one term of a public member
expires each year.
(a) The governor may remove a public member of the board from office only for cause. A removal by the
governor must be in writing and must state the reason for the removal. A member who is removed by the
governor may not participate in board business and may not be counted for purposes of establishing a
quorum after the member receives written notice of removal from the governor.
(b) A vacancy on the board shall be promptly filled by appointment by the governor. An appointee to a
vacancy shall hold office for the balance of the term for which the appointee's predecessor on the board
was appointed.
(c) A vacancy on the board does not impair the authority of a quorum of the board to exercise all the
powers and perform all the duties of the board.
Four members of the board constitute a quorum for the transaction of business and the exercise of the
powers and duties of the board. Action may be taken only upon affirmative vote of a majority of the full
membership of the board.
Public members of the board receive an honorarium of $400 for each day spent at a meeting of the board or
at a meeting of a subcommittee of the board or at a public meeting as a representative of the board.
Members of the board are entitled to per diem and travel allowances as provided by law for members of
state boards and commissions.
The board may employ and determine the salary of an executive director. The executive director may, with
the approval of the board, select and employ additional staff as necessary. An employee of the corporation,
including the executive director, may not be a member of the board. The executive director and the other
employees of the board are in the exempt service under AS 39.25.
(a) Members of the board, the executive director, and investment officers of the corporation are subject to
the provisions of AS 39.50.
(b) If a member of the board or an employee of the corporation acquires, owns, or controls an interest,
direct or indirect, in an entity or project in which fund assets are invested, the member shall immediately
disclose the interest to the board. The disclosure is a matter of public record and shall be included in the
minutes of the board meeting next following the disclosure.
(a) The prudent-investor rule shall be applied by the board in the management and investment of fund
assets. The prudent-investor rule as applied to investments of the fund means that in making investments
the board shall exercise the judgement and care under the circumstances then prevailing that an
institutional investor of ordinary prudence, discretion, and intelligence exercises in the management of
Appendix 2: Alaska’s Constitution and Law Pertaining to the Permanent Fund 155
large investments entrusted to it not in regard to speculation but in regard to the permanent disposition of
funds, considering probable safety of capital as well as probable income.
(b) The fund assets shall only be used for income-producing investments.
(c) The board shall maintain a reasonable diversification among investments unless under the
circumstances it is clearly prudent not to do so.
(d) The board shall submit long-range and quarterly investment reports to the Legislative Budget and Audit
Committee.
(e) The corporation may not borrow money or guarantee from principal of the fund the obligations of
others except as provided in this subsection. With respect to real property investments of the fund, the
corporation may, through an entity in which the investment is made, borrow money if the borrowing is
without recourse to the corporation and the fund.
(f) The board may enter into and enforce all contracts necessary, convenient or desirable for purposes of
the corporation.
(g) Subject to the limitations contained in this section, the board may invest fund assets at the competitive
national market rates or prices that are applicable to each investment only in
(1) obligations of, or obligations insured by or guaranteed by, the United States or agencies or
instrumentalities of the United States;
(2) obligations secured by reserves paid in by the United States or agencies or instrumentalities of the
United States or obligations of corporations in which the United States is a shareholder or member;
(3) certificates of deposit and term deposits of United States domestic banks that are members of the
Federal Deposit Insurance Corporation and that may be readily sold in a secondary market at prices
reflecting fair value or that are fully secured at all times as to payment of principal and interest as described
in (m) of this section;
(4) certificates of deposit and term deposits of federally chartered savings and loan associations in Alaska
that are fully secured at all times as to payments of principal and interest as described in (m) of this section;
156 Experiences with Oil Funds: Institutional and Financial Aspects
5) certificates of deposit and term deposits of mutual savings banks in Alaska that are fully secured at all
times as to payments of principal and interest as described in (m) of this section;
(6) fixed-term certificates of indebtedness of federally insured credit unions in Alaska that are fully secured
at all times as to payments of principal and interest as described in (m) of this section;
(7) Debt instruments that have been issued by domestic entities and that are rated investment grade, or debt
instruments of comparable quality issued by nondomestic entities;
(8) short-term
(A) promissory notes that have been issued by domestic entities and that are rated investment grade; or (B)
promissory notes of comparable quality issued by nondomestic entities, the interest on which may be
payable in either United States dollars or nondomestic currencies;
(9) bankers' acceptances drawn on and accepted by United States banks each of which has a combined
capital and surplus aggregating at least $200,000,000;
(10) repurchase agreements, the securities underlying the agreements being any of the items in (1) - (6) of
this subsection;
(11) the portions of business and industrial loans made under the Rural Development Act of 1972 that are
guaranteed by the Farmers Home Administration;
(13) notes secured by mortgages granting a first lien on residential real estate improved by completed
buildings if the mortgages are insured by a private mortgage insurance corporation that is authorized to do
business in this state and has combined capital and surplus aggregating at least $20,000,000, and if loan-to-
value ratios do not exceed 90 percent; however, mortgage insurance is not necessary for residential loans
having a loan-to-value ratio of less than 70 percent and the minimum coverage of other residential loans
shall be 10 percent for those having a loan-to-value ratio greater than 70 percent but less than 90 percent
and 20 percent for those having a loan-to-value ratio of 90 percent;
(14) preferred and common stock and other equity interests in entities organized in the United States;
Appendix 2: Alaska’s Constitution and Law Pertaining to the Permanent Fund 157
(15) certificates of deposit, term deposits, or bankers' acceptances, that are issued by a United States or
non-domestic bank or trust company located outside of the United States and are denominated in United
States or non-domestic currency, if either
(A) they may be readily sold in a secondary market at prices reflecting fair value, or
(B) the issuing bank or trust company has capital, surplus, and retained earnings at the date of issue
equaling at least $500,000,000; investments made under this paragraph are not subject to the collateral
requirements for domestic certificates under (m) of this section;
(16) equity interests in, and debt obligations secured by mortgages granting a first lien on, real estate if the
real estate is located in the United States, is professionally managed, and is
(B) located within the market area of real property in which the fund holds an existing interest and is
acquired
(17) securities of nondomestic governments and nondomestic government agencies, the principal of, or
interest on, which is payable in either United States dollars or nondomestic currencies;
(18) securities of other nondomestic entities whose dividends, if any, may be payable in either United
States dollars or nondomestic currencies;
(19) taxable municipal or state debt instruments that are rated investment grade;
(20) shares in a money market or short-term investment fund that has either collateral securities of a type
authorized elsewhere in this section as acceptable collateral or securities of similar quality to those
authorized elsewhere in this section as acceptable collateral:
158 Experiences with Oil Funds: Institutional and Financial Aspects
(21) interests in a titleholding entity, real estate investment trust, real estate operating company, or other
entity whose assets consist predominantly of
(A) equity interests in real property or debt obligations secured by mortgages granting a lien on real
property, so long as the property is of a type in which the corporation is otherwise permitted to invest fund
assets under this subsection; or
(B) interests in other entities in which the corporation is permitted to invest fund assets under this
paragraph.
(h) The board may enter into future contracts for the sale of investments purchased under (g) of this
section, or for the sale of nondomestic currencies, only for the purpose of hedging an existing equivalent
ownership position in these investments or as a means of implementing asset allocation strategies.
(i) The fund may at no time own more than five percent of the voting stock of a corporation unless the
issuing corporation is an entity in which the Alaska Permanent Fund Corporation is permitted to invest
fund assets under (g)(21) of this section. Domestic stocks, except for bank and insurance company stocks
and stocks of corporations in which the Alaska Permanent Fund Corporation is permitted to invest fund
assets under (g)(21) of this section, must be listed at the date of purchase on an exchange registered with
the Securities and Exchange Commission. Except as otherwise permitted under (k) of this section, at the
time of each investment, the aggregate investment of the fund in each stated category of investment may
not exceed the following stated percentage of the total investments of the fund:
(2) real estate investments under (g)(16) and (21) of this section - 15 percent;
(3) certificates of deposit, term deposit, or bankers' acceptances under (g)(15) of this section - 20 percent;
(4) interests in domestic and nondomestic entities under (g)(14) and (18) of this section - 55 percent.
(j) The assets of the fund may not be used for the purchase of debt instruments of a corporation or other
entity upon which any regular interest payment has been defaulted within five years before purchase,
except debt instruments never in default but which have been outstanding for less than five years.
Appendix 2: Alaska’s Constitution and Law Pertaining to the Permanent Fund 159
(k) The board shall establish and from time to time as necessary modify guidelines for the investment of
the assets of the fund. Before adoption of any guidelines, the guidelines shall be reported to the Legislative
Budget and Audit Committee for review and comment. Notwithstanding (g), (h) and (j) of this section or
the percentage investment limitations under (i) of this section and so long as doing so satisfies the prudent-
investor rule under (a) of this section, the board may invest up to ten percent of the total assets of the fund
in either or a combination of the following:
(1) other types of investments not specifically listed in (g) of this section;
(2) categories of investment subject to the percentage investment limitations established in (i) of this
section, even though investing additional assets in a category will cause the aggregate investment in the
category to exceed the applicable percentage limitation.
(l) The board shall invest the assets of the fund in in-state investments to the extent in-state investments are
available if the in-state investments
(1) have a risk level and expected yield comparable to alternate investment opportunities; and
(2) are included in the list of permissible investments in (g) of this section.
(m) Certificates of deposit or the equivalent instruments that are not of a quality that may be readily sold in
a secondary market at prices reflecting fair value must be secured by a pledge as collateral of
(1) investments authorized for the fund under (g)(1), (2), (4), or (8) - (10) of this section;
(2) obligations of the state or instrumentalities of the state that are rated at least "A" by a major bond rating
service and have a demonstrated secondary market;
(4) the portion of first lien real estate mortgages guaranteed by the federal Department of Veterans Affairs;
or
160 Experiences with Oil Funds: Institutional and Financial Aspects
(5) notes secured by mortgages granting a first lien on commercial or residential real estate improved by
completed buildings if the originating financial institution retains at least 25 percent of the mortgage until
maturity.
(n) Investments or obligations pledged as collateral under (m) of this section must have value at least equal
to the face value of the certificates of deposit being secured. The board may require substitution of
collateral in order to ensure continued satisfaction of the requirements set out in (m) of this section.
(o) For purposes of (g) of this section, "investment grade" means a Standard & Poor's Corporation rating
BBB or better, or Moody's Investors Service, Inc., rating of Baa or better, including a rating with a "+" or
"-" designation or other variations that occur within these ratings, or a comparable rating by another
nationally recognized rating organization.
(p) For purposes of applying the percentage investment limitations established in (i) of this section, if the
board determines that a particular form of investment authorized under (g) of this section may
appropriately be classified in more than one category of investment, it may elect the category to which that
form of investment is assigned.
Net income of the fund includes income of the earnings reserve account established under AS 37.13.145.
Net income of the fund shall be computed annually as of the last day of the fiscal year in accordance with
generally accepted accounting principles, excluding any unrealized gains or losses. Income available for
distribution equals 21 percent of the net income of the fund for the last five fiscal years, including the fiscal
year just ended, but may not exceed net income of the fund for the fiscal year just ended plus the balance in
the earnings reserve account described in AS 37.13.145.
(a) The earnings reserve account is established as a separate account in the fund. Income from the fund
shall be deposited by the corporation into the account as soon as it is received. Money in the account shall
be invested in investments authorized under AS 37.13.120.
Appendix 2: Alaska’s Constitution and Law Pertaining to the Permanent Fund 161
(b) At the end of each fiscal year, the corporation shall transfer from the earnings reserve account to the
dividend fund established under AS 43.23.045, 50 percent of the income available for distribution under
AS 37.13.140.
(c) After the transfer under (b) of this section, the corporation shall transfer from the earnings reserve
account to the principal of the fund an amount sufficient to offset the effect of inflation on principal of the
fund during that fiscal year. The corporation shall calculate the amount to transfer to the principal under
this subsection by
(1) computing the average of the monthly United States Consumer Price Index for all urban consumers for
each of the two previous calendar years;
(2) computing the percentage change between the first and second calendar year average; and
(3) applying that rate to the value of the principal of the fund on the last day of the fiscal year just ended.
(d) Notwithstanding (b) of this section, income earned on money awarded in or received as a result of State
v. Amerada Hess, et al., 1JU-77-847 Civ. (Superior Court, First Judicial District), including settlement,
summary judgment, or adjustment to a royalty-in-kind contract that is tied to the outcome of this case, or
interest earned on the money, or on the earnings of the money shall be treated in the same manner as other
income of the Alaska permanent fund, except that it is not available for distribution to the dividend fund,
and shall be annually deposited into the principal of the Alaska permanent fund.
The revenue generated by the fund's investments must be identified as the source of the operating budget of
the corporation in the state's operating budget under AS 37.07 (Executive Budget Act). The unexpended
balance of the corporation's annual operating budget does not lapse at the end of the fiscal year but shall be
treated as income under AS 37.13.140.
The Legislative Budget and Audit Committee may provide for an annual post audit and annual operational
and performance evaluations of the fund's investments and investment programs.
162 Experiences with Oil Funds: Institutional and Financial Aspects
By September 30 of each year, the board shall publish a report of the fund for distribution to the governor
and the public. The board shall notify the legislature that the report is available. The report shall be written
in easily understandable language. The report must include financial statements audited by independent
outside auditors, a statement of the amount of money received by the fund from each investment during the
period covered, a statement of investments of the fund including an appraisal at market value, a description
of fund investment activity during the period covered by the report, a comparison of the fund performance
with the intended goals contained in AS 37.13.020, an examination of the effect of the investment criteria
of this chapter on the fund portfolio with recommendations of any needed changes, and any other
information the board believes would be of interest to the governor, the legislature, and the public. The
annual income statement and balance sheet of the fund shall be published in at least one newspaper in each
judicial district. The income statement and balance sheet for the two fiscal years preceding the publication
of the election pamphlet under AS 15.58 shall be included in that pamphlet.
The corporation and the fund are exempt from all taxes and assessments in the state. All security
instruments issued by the corporation or the fund, their transfer, and their income are exempt from all taxes
and assessments in the state.
The resources of the corporation or the fund may not be used to finance or influence political activities.
Information in the possession of the corporation is a public record, except that information that discloses
the particulars of the business or affairs of a private enterprise or investor is confidential and is not a public
record. Confidential information may be disclosed only for the purposes of an official law enforcement
investigation or when its production is required in a court proceeding. These restrictions do not prohibit the
publication of statistics presented in a manner that prevents the identification of particular reports, items,
persons, or enterprises.
Appendix 2: Alaska’s Constitution and Law Pertaining to the Permanent Fund 163
The board may adopt regulations under AS 44.62 (Administrative Procedure Act) to interpret and
implement this chapter.
Appendix 3
Documents on the Norwegian Government
Petroleum Fund
§ 1. The Act shall regulate the deployment and investment of a fund intended to safeguard long-term
interests through the use of petroleum revenues.
§ 2. The Fund’s income consists of the cash flow from petroleum activities, which is transferred from the
central government budget, the return on the Fund’s capital and net financial transactions associated with
petroleum activities.
total tax revenues and royalty deriving from petroleum activities collected pursuant to Act no. 35 of 13
June 1975 relating to Taxation of Offshore Petroleum Resources and Act no. 11 of 22 March 1985 relating
to Petroleum Activities
revenues deriving from tax on CO2 emissions due to petroleum activities on the continental shelf
revenues deriving from the State’s direct financial interest in petroleum activities, defined as
operating income and other income less operating expenses and other direct expenses
central government revenues from net surplus agreements associated with certain production
licenses
central government revenues deriving from the removal or alternative use of installations on the
continental shelf
any government sale of stakes representing the State’s direct financial interest in petroleum
activities
less
165
166 Experiences with Oil Funds: Institutional and Financial Aspects
central government expenses in connection with the removal or alternative use of installations on
the continental shelf
any government purchase of stakes as part of the State’s direct financial interest in petroleum
activities
Net financial transactions associated with petroleum activities are the sum of:
less
government capital contributions to Statoil ASA and the company/companies promoting the
State’s interests in petroleum activities
§ 3. The Fund’s capital may only be used for transfers to the central government budget pursuant to a
resolution by the Storting (Norwegian Parliament). The Fund’s capital may not be used in any other way,
nor may it be used to provide credit to the central government or to private sector entities.
§ 4. The Fund’s capital shall be invested in the same manner as the central government’s other assets.
§ 5. The Fund may not raise loans. The Fund itself has no rights or obligations vis-à-vis private sector
entities or public authorities. The Fund cannot be subjected to legal proceedings and may not institute legal
proceedings.
§ 7. The King may issue provisions to supplement this Act and concerning its implementation, including
provisions relating to the establishment of the Fund, its management, etc.
§ 8. This Act comes into force on the date decided by the King.
Norges Bank manages the Government Petroleum Fund on behalf of the Ministry of Finance. The Bank
may use other managers. Such managers must have adequate internal ethical guidelines for their own
activity.
Norges Bank shall submit reports on the management of the Government Petroleum Fund in accordance
with the guidelines set out by the Ministry of Finance.
Appendix 3: Documents on the Norwegian Government Petroleum Fund 167
The Government Petroleum Fund shall be placed in a separate account in the form of NOK deposits in
Norges Bank. Norges Bank shall invest this capital separately in its own name in financial instruments and
cash deposits denominated in foreign currency.
Norges Bank shall seek to achieve the highest possible return on investments denominated in foreign
currency within the limits set out in the regulation and the guidelines issued pursuant to this regulation.
The value of the Petroleum Fund’s krone account is set at the value of the portfolio of financial instruments
and cash deposits. Norges Bank’s book return on the portfolio, less remuneration to Norges Bank, shall be
added to the Petroleum Fund’s krone account on 31 December every year.
Following consultation with Norges Bank, the Ministry of Finance shall establish a benchmark portfolio
for the Government Petroleum Fund. The Ministry shall set a maximum limit for the expected return
differential between investments in the Petroleum Fund and the benchmark portfolio, measured in the form
of tracking error.
§ 5. Asset mix
The Government Petroleum Fund shall be invested in accordance with the following asset distribution:
When calculating the asset distribution in accordance with the first paragraph, equity derivatives shall be
treated as though investment had taken place directly in the underlying equity instrument. In accordance
with the first paragraph, the asset distribution must be calculated on the basis of the whole of the ordinary
portfolio excluding derivatives.
The equity portfolio shall be invested according to the following currency and market distribution:
1. Europe 40-60%
The portfolio may be invested in equity instruments listed on stock exchanges in the following countries
and regions:
168 Experiences with Oil Funds: Institutional and Financial Aspects
Europe: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands,
Portugal, Spain, Sweden, Switzerland, Turkey, the UK, Iceland, Cyprus, Poland, Czech Republic and
Hungary
Asia and Oceania: Australia, Hong Kong, Japan, New Zealand, Singapore, South Korea, Taiwan,
Thailand, the Philippines, India, Indonesia, China and Malaysia
Total investments in equity instruments in Turkey, Brazil, Mexico, South Korea, Taiwan, Thailand,
Poland, Czech Republic, Hungary, Chile, the Philippines, India, Indonesia, China, Malaysia, Israel and
South Africa shall not exceed 5 per cent of the combined investments in equity instruments, measured by
currency or market share.
The interest bearing portfolio shall be invested according to the following currency and market
distribution:
1. Europe 45-65%
The portfolio may be invested in interest bearing instruments issued in the currency of one of the following
countries or regions:
Europe: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands,
Portugal, Spain, Sweden, Switzerland, the UK, Iceland, Cyprus, Poland, Czech Republic and Hungary
Asia and Oceania: Australia, Hong Kong, Japan, New Zealand, Singapore and South Korea
Modified duration for the total portfolio of interest-bearing instruments and associated derivatives shall be
between 3 and 7.
§ 8. Credit risk
The Ministry of Finance shall establish limits for credit risk in the Government Petroleum Fund.
The Ministry of Finance issues ethical guidelines for the Government Petroleum Fund and decides on
whether specific issuers should be excluded from the investment universe. An Advisory Council on Ethics
provides an evaluation of whether potential investments in financial instruments issued by specified issuers
are inconsistent with the ethical guidelines.
The Ministry of Finance may issue detailed rules for the Council, its activities and its organisation.
Norges Bank shall ensure that satisfactory risk systems and control routines exist for the instruments to be
used in the management of the Government Petroleum Fund. Derivatives may be used provided that the
financial exposure does not exceed the exposure that would have resulted from investing directly in the
underlying instruments.
Investments may not be made in such a way that the Government Petroleum Fund exceeds 3 per cent of the
equity capital in a single company or 3 per cent of the voting shares in a single company.
Norges Bank shall exercise ownership rights for the Government Petroleum Fund. The primary objective
of the exercise of ownership rights is to safeguard the Fund’s financial interests. The Ministry of Finance
may issue supplementary guidelines for Norges Bank’s exercise of ownership rights.
The regulation enters into force on 1 December 2004. The regulation of 3 October 1997 nr 1078 on the
management of the Government Petroleum Fund shall be revoked the same date.
All notifications that affect this agreement shall be in writing and signed. Such notifications shall be
communicated to Norges Bank Investment Management and to the Economic Policy Department of the
Ministry of Finance.
170 Experiences with Oil Funds: Institutional and Financial Aspects
Norges Bank shall manage the Fund in accordance with the law, the financial management regulation for
the central government, regulations and other decisions and guidelines that apply to the Fund (cf Clauses 1
and 3.1). Matters of special importance shall be submitted to the Ministry of Finance.
Quarterly and annual reports on the management of the Fund, to be drawn up by Norges Bank in
accordance with guidelines laid down by the Ministry (cf Section 1 of the regulation), shall be approved by
Central Bank Audit. Norges Bank shall without undue delay notify the Ministry of significant changes or
expected significant changes in the Fund’s assets. Norges Bank shall provide the Ministry of Finance with
information as requested by the Ministry, including information in machine-readable form to companies
that assist the Ministry in evaluating Norges Bank’s management of the Government Petroleum Fund.
Norges Bank is liable for paying damages to the State for losses arising as a result of negligence or intent
on the part of the Bank, external managers or external service providers operating under an agreement with
the Bank (cf Clause 2.2, first paragraph of the agreement).
Norges Bank may use external managers and external service providers in the management of the Fund.
Norges Bank is party to agreements with such service providers, and shall supervise their activity on behalf
of the Fund.
The Ministry of Finance shall be informed of the choice of external service providers of major importance
to management and the basis for the selection. The Ministry shall receive copies of the annexes relating to
remuneration in new management agreements entered into by Norges Bank with external managers in
connection with the management of the Fund. Remuneration to external managers shall be such that the
Petroleum Fund retains the major part of increases in the excess return. The Ministry of Finance may
require Norges Bank to submit to the Ministry all contracts entered into in connection with the
management of the Fund.
At the request of the Ministry of Finance, Norges Bank shall provide the Ministry with advice regarding
amendments to the framework conditions for management, including regulations, decisions and guidelines
laid down by the Ministry. Norges Bank may also submit its own proposals for such changes in the
framework conditions as the Bank considers advisable.
At the request of the Ministry of Finance or the commission, as specified in Section 9 of Regulation no.
1078 of 3 October 1997, Norges Bank shall secure information about specified issuers, and supply the
commission with this information.
If the Ministry of Finance makes decisions to exclude particular financial instruments from the
Government Petroleum Fund’s investment universe, Norges Bank shall be given a period of at least four
weeks in which to unwind any such positions the Fund might have.
Norges Bank shall notify the Ministry of Finance when a position has been unwound. The Ministry of
Finance shall consider whether to announce the assessments of the commission and the Ministry of Finance
on a case-to-case basis (cf. the Royal Decree of 30 November 2001). If management considerations
Appendix 3: Documents on the Norwegian Government Petroleum Fund 171
indicate the necessity, the Ministry shall endeavour to postpone announcement until it has been notified
that a position has been unwound.
2.5 Information
Norges Bank shall provide information concerning the Fund’s management to the public, in accordance
with the Public Information Act and the Public Administration Act and detailed guidelines issued by the
Ministry of Finance.
Norges Bank shall have the opportunity to express its view before any changes are made to regulations,
decisions or guidelines on management, and shall be notified in due time for changes to be made in the
portfolio.
3.2 Remuneration
Remuneration shall be subject to Annex 1 to this agreement. Changes in the method for calculating
remuneration for the following calendar year may be requested by either party before 1 December of each
year.
Remuneration is drawn from the Fund’s gross return before the net return is transferred to the Fund’s krone
account on 31 December of each year. Norges Bank shall submit its remuneration calculations to the
Ministry of Finance as early as possible and no later than one week before finalising the accounts.
3.3 Crediting
If relevant, the Ministry of Finance transfers capital from the Treasury to the Fund’s krone account in
Norges Bank. The deadline for notifying Norges Bank and the final amount credited in NOK shall be in
accordance with the prevailing “Guidelines for rebalancing the Petroleum Fund”.
The Ministry of Finance shall inform Norges Bank of any drawings on the Fund in due time for the Bank
to make any portfolio adjustments. The Ministry of Finance will inform Norges Bank of the account to
which the transfer is to be credited.
3.5 Taxation
The Ministry of Finance shall contribute to providing the documentation necessary to clarify the tax
position of capital from the Fund that has been invested abroad.
The agreement shall be revised when changes to laws or regulations, decisions or guidelines so require.
This agreement and the annex thereto may not otherwise be amended without the written approval of both
parties.
172 Experiences with Oil Funds: Institutional and Financial Aspects
This agreement enters into force on 1 January 2002. If neither of the parties has given written notification
by 31 December in a given year that the agreement is to be terminated as from 31 December of the
following year, the agreement will continue to apply one year at a time until such notification is given.
The Ministry of Finance issues further specified rules and instructions in connection with the termination
of the management assignment, including severance pay and other remuneration to Norges Bank in
connection with the termination. Clause 3.1 applies accordingly.
1. The environmental portfolio is to be established on 31 January 2001, with capital of NOK 1 billion.
Changes in the amount invested may be made pursuant to specific decisions. The portfolio forms part of
the Government Petroleum Fund and is to be managed by Norges Bank.
2. The environmental portfolio is to be invested exclusively in equity instruments listed on stock exchanges
in the following countries and regions:
Europe: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the
Netherlands, Portugal, Spain, Sweden, Switzerland and the UK
Asia and Australia, Hong Kong, Japan, New Zealand and Singapore
Oceania:
3. The benchmark portfolio for the Environmental Portfolio consists of those companies in the FTSE
indices for the countries listed above which fulfill specific requirements regarding environmental reporting
or environmental management systems. Companies that are considered to have little negative impact on the
environment are also included, even if they do not comply with the reporting and certification
requirements. The British consulting company Ethical Investment Research Service (EIRIS) has been
commissioned by the Ministry of Finance to identify these companies.
Appendix 3: Documents on the Norwegian Government Petroleum Fund 173
4. At the time of establishment, the regional distribution of the benchmark portfolio for the environmental
portfolio is set at 50 per cent in Europe, 30 per cent in North America and 20 per cent in Asia/Oceania. The
country weights within each region are determined by the market value of the companies that fulfill the
criteria. Within each country, the approved companies are weighted in proportion to their market value.
The regional weights in the environmental portfolio will not be rebalanced, but will vary with
developments in market value in the regions.
5. The environmental portfolio’s investment universe and the benchmark portfolio are identical with two
exceptions: First, companies that are removed from the benchmark portfolio may remain in the
environmental portfolio for a further three months. Second, investments may be made in companies that
EIRIS or FTSE has decided to include before the companies are actually added to the benchmark portfolio.
6. The upper limit for the expected tracking error for the environmental portfolio in relation to its
benchmark portfolio is 1 percentage point.
7. Norges Bank is to report on the management of the environmental portfolio at the same time as it reports
on the management of the Petroleum Fund in general. The Bank shall assist in gathering and processing
data for use in evaluating the environmental portfolio after three years of operations.
8. The benchmark portfolio is to be constructed on the basis of the FTSE GEIS (Global Equity Index
Series) with sub-indices for large and medium-sized companies, but excluding sub-indices for small
companies, and a list from EIRIS of companies that fulfill the environmental criteria. On behalf of the
Ministry of Finance, EIRIS is responsible for sending the list of companies that fulfill the environmental
criteria to Norges Bank and the index providers simultaneously.
1 Basis
The ethical guidelines for the Government Petroleum Fund are based on two premises:
The Government Petroleum Fund is an instrument for ensuring that a reasonable portion of the country’s
petroleum wealth benefits future generations. The financial wealth must be managed with a view to
generating a sound return in the long term, which is contingent on sustainable development in the
economic, environmental and social sense. The Fund’s financial interests should be consolidated by using
the Fund’s ownership interests to promote sustainable development.
The Government Petroleum Fund should not make investments that entail an unacceptable risk that the
Fund is contributing to unethical actions or omissions, such as violations of fundamental humanitarian
principles, gross violations of human rights, gross corruption or severe environmental degradation.
2 Mechanisms
The ethical basis for the Government Petroleum Fund shall be promoted using the following three
mechanisms:
Exercise of ownership rights to promote long-term financial returns based on the UN’s Global Compact
and the OECD Guidelines for Corporate Governance and for Multinational Enterprises.
174 Experiences with Oil Funds: Institutional and Financial Aspects
Negative screening from the investment universe of companies that either themselves or through entities
they control produce weapons whose normal use violates fundamental humanitarian principles.
Exclusion of companies from the investment universe where there is deemed to exist a considerable risk of
contributing to:
Gross or systematic violation of human rights, such as murder, torture, deprivation of liberty,
forced labour, the worst forms of child labour and other child exploitation
Gross corruption
3.1
The primary objective of Norges Bank’s exercise of ownership rights for the Government Petroleum Fund
is to safeguard the Fund’s financial interests. The exercise of ownership rights shall be based on a long-
term horizon for the Fund’s investments, and broad investment diversification in the markets that are
included in the investment universe. The exercise of ownership rights shall primarily be based on the UN’s
Global Compact and the OECD Guidelines for Corporate Governance and for Multinational Enterprises.
Norges Bank’s internal guidelines for the exercise of ownership rights shall stipulate how these principles
are to be integrated into the exercise of ownership rights.
3.2
Norges Bank shall report on its exercise of ownership rights in connection with its ordinary annual
reporting. An account shall be provided of how the Bank has acted as owner representative – including a
description of the work to promote special interests relating to the long-term horizon and diversification of
investments in accordance with Sections 3.1 and 3.2.
3.3
Norges Bank may delegate the exercise of ownership rights to external managers in accordance with these
guidelines.
4.1
The Ministry of Finance shall make decisions on negative screening and exclusion of companies from the
investment universe based on the recommendations of the Government Petroleum Fund’s Council on
Ethics.
Appendix 3: Documents on the Norwegian Government Petroleum Fund 175
The recommendations and decisions are to be made public. The Ministry can in certain cases postpone the
time of public disclosure if this is deemed necessary in order to ensure a financially sound implementation
of the exclusion of the company concerned.
4.2
The Government Petroleum Fund’s Council on Ethics shall be composed of five members. The Council
shall have its own secretariat. The Council shall submit an annual report on its activities to the Ministry of
Finance.
4.3
The Council is to issue recommendations at the request of the Ministry of Finance on whether an
investment may be in violation of Norway’s obligations under international law.
4.4
The Council is to issue recommendations on negative screening of one or several companies on the basis of
the production of weapons whose normal use is in violation of fundamental humanitarian principles. The
Council is to issue recommendations on the exclusion of one or more companies from the investment
universe where there is deemed to exist a considerable risk of contributing to actions or omissions that
involve:
Gross or systematic violation of human rights, such as murder, torture, deprivation of liberty,
forced labour, the worst forms of child labour and other forms of child exploitation
Gross corruption
The Council is to raise matters under this section on its own initiative or at the request of the Ministry of
Finance.
Appendix 4
The State Oil Fund of Azerbaijan (SOFAZ)
Business co-operation between the State Oil Company of the Republic of Azerbaijan and leading
international oil companies, which had been commenced with the signing of the Contract of the Century in
1994, is about to give its first real results. To direct expected revenues towards social-economic progress of
the Republic of Azerbaijan is a primary purpose of the state policy.
Taking the aforementioned into account, and for the purposes of securing accumulation and efficient
management of currency and other revenues generated from sale of profit oil produced as a result of joint
development of oil fields with foreign companies, application of such proceeds to development of primary
areas and performance of projects of social-economic significance, it is hereby decreed:
2. To accumulate resources of the State Oil Fund of the Republic of Azerbaijan on the account of the
following sources:
2.1. Revenues generated from implementing agreements on exploration, development and production
sharing for oil and gas fields in the territory of the Republic of Azerbaijan including the Azerbaijani
sector of the Caspian Sea (Lake), as well as other agreements on oil and gas exploration, development
and transportation entered into between the State Oil Company of the Republic of Azerbaijan or other
authorized state body and investors:
2.1.1. Net revenues from the sale of hydrocarbons falling on the share of the Republic of
Azerbaijan (to deduct expenditures incurred for hydrocarbons transportation, customs clearance
and bank costs, marketing, insurance and independent surveyor fees and not to include revenues
falling on a participating interest or investment of the State Oil Company of the Republic of
Azerbaijan in a project if it is an investor, participant or a contracting party of this project);
2.1.2. Oil and gas agreements signature and/or performance bonuses paid by investors to the
State Oil Company of the Republic of Azerbaijan or an authorized state body;
2.1.3. Acreage payments due to the State Oil Company and/or an authorized state body of the
Republic of Azerbaijan from investors for the use of contract area in connection with oil and
gas exploration and development;
177
178 Experiences with Oil Funds: Institutional and Financial Aspects
2.1.4. Dividends and profit participation revenues falling on the share of the Republic of
Azerbaijan in connection with oil and gas agreements implementation (not to include revenues
falling on a participating interest or investment of the State Oil Company of the Republic of
Azerbaijan in a project if it is an investor, participant or a contracting party of this project);
2.1.5. Revenues generated from oil and gas pass over the territory of the Republic of Azerbaijan
with the use of Baku-Supsa, Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzerum export pipelines;
2.1.6. Revenues generated from transfer of assets from investors to the State Oil Company
and/or an authorized state body within the framework of oil and gas agreements;
2.2. Revenues generated from placement and management of the Fund's assets, including interest,
dividend, asset revaluation and other revenues;
3. Sale of the Republic of Azerbaijan's share of crude oil and gas shall be carried out by the State Oil
Company of the Republic of Azerbaijan.
4. The Cabinet of Ministers of the Republic of Azerbaijan shall prepare within two (2) months proposals
on Regulations of the State Oil Fund of the Republic of Azerbaijan and composition of supreme
management authorities thereof and submit the same to the President of the Republic of Azerbaijan.
5. To order the National Bank of the Republic of Azerbaijan to secure, prior to commencement of activities
by the State Oil Fund of the Republic of Azerbaijan, accumulation of assets of the latter on a special
account.
1.1. The State Oil Fund of the Republic of Azerbaijan (hereinafter referred to as "Fund") has been
established in accordance with the Presidential Decree #240 dated December 29, 1999 "On
Establishment of the State Oil Fund of the Republic of Azerbaijan" to ensure effective management
of the country's assets, which are generated from implementation of agreements signed between the
State Oil Company (or Authorized Government Body) and investors in regards to oil/gas exploration,
development and production sharing, including those generated from the implementation of other
agreements concerning exploration and development of the oil/gas reserves in the Azeri sector of the
Caspian.
1.2. The Fund shall be accountable and responsible to the President of the Republic of Azerbaijan.
1.3. The Fund is an extra-budgetary institution. The Fund is a legal entity and shall have settlement
account and other accounts at banking institutions. The Fund shall have a seal with the State Emblem
and its name engraved on it, as well as appropriate stamp and paper forms.
1.4. A Supervisory Board shall exercise general control over establishment and spending of the
Fund's assets.
1.5. In the implementation of its activities, the Fund shall cooperate with government bodies,
individuals and legal entities of the Republic of Azerbaijan, as well as with international
organizations.
Appendix 4: The State Oil Fund of the Republic of Azerbaijan (SOFAZ) 179
1.6. Except for rights and responsibilities assigned by Presidential Decrees and by these Regulations,
the Fund:
a) shall not have any rights, responsibilities and shall not bear any commitments in relationships
with the Government of the Republic of Azerbaijan, other government bodies, including
ministries, state committees, public institutions, enterprises and organizations and financial
institutions, as well as in relationships with any social funds, public and other non-
governmental organizations under jurisdiction of the Republic of Azerbaijan or of another
country;
b) shall not bear any responsibility related with commitments or guarantees of the Government
of the Republic of Azerbaijan, other government bodies, public enterprises, institutions and
organizations.
1.7. The Fund's operation shall be guided by the Constitution and laws of the Republic of Azerbaijan,
Presidential Decrees and Resolutions, as well as by these Regulations.
Main responsibility of the Fund is to ensure collection and effective management of foreign currency and
other assets that are generated from the implementation of agreements signed in the field of oil/gas
exploration and development, as well as from the Fund's own activities, in the interest of citizens of the
Republic of Azerbaijan and their future generations.
3.1. The Fund shall be formed on the account of the following sources:
3.1.1. Revenues generated from implementing agreements on exploration, development and
production sharing for oil and gas fields in the territory of the Republic of Azerbaijan including
the Azerbaijani sector of the Caspian Sea (Lake), as well as other agreements on oil and gas
exploration, development and transportation entered into between the State Oil Company of the
Republic of Azerbaijan or other authorized state body and investors:
3.1.1.1. Net revenues from the sale of hydrocarbons falling on the share of the Republic of
Azerbaijan (to deduct expenditures incurred for hydrocarbons transportation, customs
clearance and bank costs, marketing, insurance and independent surveyor fees and not to
include revenues falling on a participating interest or investment of the State Oil Company
of the Republic of Azerbaijan in a project if it is an investor, participant or a contracting
party of this project);
3.1.1.2. Oil and gas agreements signature and/or performance bonuses paid by investors to
the State Oil Company of the Republic of Azerbaijan or an authorized state body;
3.1.1.3. Acreage payments due to the State Oil Company and/or an authorized state body
of the Republic of Azerbaijan from investors for the use of contract area in connection
with oil and gas exploration and development;
3.1.1.4. Dividends and profit participation revenues falling on the share of the Republic of
Azerbaijan in connection with oil and gas agreements implementation (not to include
revenues falling on a participating interest or investment of the State Oil Company of the
Republic of Azerbaijan in a project if it is an investor, participant or a contracting party of
this project);
180 Experiences with Oil Funds: Institutional and Financial Aspects
3.1.1.5. Revenues generated from oil and gas pass over the territory of the Republic of
Azerbaijan with the use of Baku-Supsa, Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzerum
export pipelines;
3.1.1.6. Revenues generated from transfer of assets from investors to the State Oil
Company and/or an authorized state body within the framework of oil and gas
agreements;
3.1.2. Revenues generated from placement and management of the Fund's assets, including
interest, dividend, asset revaluation and other revenues;
3.1.3. Grant and other free aid;
3.1.4. Other revenues and receipts in accordance with the legislation.
3.2. The Fund's assets under management shall be placed in investment grade rated banks and
instruments.
3.3. The Supervisory Board of the Fund determines rules for accounting and reporting the use of the
Fund's assets.
4.1. Utilization (spending) of the Fund's resources shall be based on the principle of limiting Fund's
expenditures in any financial year to its revenues in the same year.
4.2. Utilization of the Fund's assets shall be carried out in accordance with main directions (program)
to be approved each year through Presidential Resolutions.
4.3. The Fund's assets may be used for solving the most important nation-wide problems, and for
construction and reconstruction of strategically significant infrastructure facilities, for the purpose of
the country's socio-economic progress.
4.4. Information about approved directions for utilization of the Fund's assets for each year, as well as
annual report about their actual disbursement shall be published in press.
4.5. The Fund's assets may neither be used for lending to government bodies, public and non-public
enterprises (organizations), nor as collateral for debts (commitments, guarantees) or other liabilities
of any entity under jurisdiction of the Republic of Azerbaijan.
4.6. The Fund's revenues shall be exempt from tax, duties and other charges in accordance with the
legislation.
5.1. Executive Director shall carry out operational management of the Fund's activities.
5.2. The Executive Director shall be appointed to and dismissed from this position by the President of
the Republic of Azerbaijan.
- prepare proposals regarding main directions (program) for utilization of the Fund's assets and
submit them for approval to the President of the Republic of Azerbaijan together with opinion
of the Supervisory Board;
- prepare annual report on the Fund's operations and submit it to the President of the Republic
of Azerbaijan together with opinion of the Supervisory Board;
- prepare cost estimates for managing the Fund (including maintenance costs of the central
office) and submit them to the President of the Republic of Azerbaijan for approval;
- organize preparation of necessary materials based on assignments of the President of the
Republic of Azerbaijan;
- appoint and dismiss employees of the Fund's central office in a manner determined by the
legislation, and apply encouragement and punishment measures to them;
- ensure the creation of necessary conditions for revision by auditor to be appointed by the
President of the Republic of Azerbaijan;
- publish in the press the auditor's opinion, which reflects results of the Fund's annual
operations;
- prepare analytical information regarding the Fund's activities, and submit it to the President of
the Republic of Azerbaijan and to the Supervisory Board;
- exercise other powers in accordance with the legislation of the Republic of Azerbaijan and
these Regulations.
5.4. For the purpose of general supervision over the Fund's activities, the Supervisory Board shall be
established comprised of representatives from relevant state bodies and public organizations, as well
as of other persons.
5.5. Members of the Supervisory Board shall be approved by the President of the Republic of
Azerbaijan.
5.6. The Supervisory Board shall review and give its opinion on the main directions (program) for
utilization of the Fund's assets, the Fund's annual report (together with the auditor's opinion attached
to it) and balance, as well as on the Fun's draft annual cost estimates to be presented to it by the
Executive Director.
5.7. The Supervisory Board shall meet when necessary but not less than once a quarter. Ad hoc
meetings may be held upon initiative by the executive director or by half of the Supervisory Board's
members.
5.8. Members of the Supervisory Board shall carry out their work on social grounds (i.e. without
remuneration).
The Fund shall maintain accounting and statistical reporting in a manner determined by the legislation. The
Fund's annual operations report must be examined and approved by an independent auditor to be appointed
by the President of the Republic of Azerbaijan.
Any change or addition to the Fund's Regulations shall be approved by the President of the Republic of
Azerbaijan.
182 Experiences with Oil Funds: Institutional and Financial Aspects
Reestablishment and liquidation of the Fund shall be carried out through decree by the President of the
Republic of Azerbaijan.
4.C: Asset Management Rules (Guidelines) for the State Oil Fund of the
Republic of Azerbaijan
The goals of these Rules:
These Rules shall apply only to the Fund's assets comprising the investment portfolio of the Fund that is
the total Fund's assets denominated in foreign currency less the amount to cover expenditures of the Fund
as per its budget.
Management arrangements
The authority to hold, place and manage the foreign currency assets of the Oil Fund in compliance with its
investment policy and these Rules as well as to determine the relevant internal procedures of the Oil Fund
is vested with the Executive Director of the Oil Fund.
Management of the Oil Fund's foreign currency assets shall be carried out in accordance with the Oil
Fund's investment policy.
Financial institutions specialized in investment portfolio management (external managers) may be invited
to manage some portion of the Oil Fund's investment portfolio. External managers shall have a credit rating
of not less than AA- (Standard & Poor, Fitch) and Aa3 (Moody's).
In the Republic of Azerbaijan, the Oil Fund's clearing accounts shall be opened only at the National Bank
of Azerbaijan (NBA).
Outside the Republic of Azerbaijan, the clearing accounts of the Oil Fund shall be opened at banks rated
by reputable international rating agencies such as Standard & Poor's, Moody's and Fitch with a long-term
credit rating not lower than: "AA-" - as defined by Standard & Poor's, Fitch or "Aa3" - as defined by
Moody's.
The counterparts of the Oil Fund in international financial markets shall be commercial banks and other
financial institutions with a long term credit rating of at least A (Standard & Poor, Fitch) or A2 (Moody's).
The opening and maintenance of bank or other accounts (securities depositary accounts) for the Oil Fund
shall be based on an appropriate contract (agreement). Contracts (agreements) on the holding, placement
and management of the foreign currency assets shall be signed by the Oil Fund's Executive Director on
behalf of the Oil Fund.
Appendix 4: The State Oil Fund of the Republic of Azerbaijan (SOFAZ) 183
Custodian (depositary) services on securities shall be provided to the Oil Fund by:
• Commercial banks and other financial institutions which have a rating of at least AA- (Standard &
Poor, Fitch) or Aa3 (Moody's);
Foreign currency composition of investment portfolio
The Oil Fund's foreign currency assets shall comprise currencies and /or investment assets denominated in
the following currencies:
• Euro
• US Dollar
• Japanese Yen
• Pound sterling
Other currencies of countries which have a long-term country rating which is not less than A (Standard &
Poor, Fitch) or A2 (Moody's), provided that such assets shall not exceed 5% of the total investment
portfolio and shall be fully hedged back into US dollars
• Shall be prepared by its Executive Director within the framework of the draft program for the
utilization of the Oil Fund's assets
• Shall be submitted jointly with the opinion of the Oil Fund's Supervisory Board on the proposed
investment policy to the President of the Republic of Azerbaijan
In line with the generally accepted principles of foreign currency asset management, the Oil Fund's
investment policy shall specify:
• The portion of the investment portfolio assigned to external managers for management, its
investment horizon
184 Experiences with Oil Funds: Institutional and Financial Aspects
Permitted investments
The following assets may comprise the Oil Fund's investment portfolio:
• State Securities (bonds) issued by governments of countries which have long-term country
(sovereign debt) ratings of at least A (Standard & Poor, Fitch) or A2 (Moody's);
• Securities issued by financial institutions that have state guarantees or by state agencies and
governments of countries which have long-term country (sovereign debt) ratings of at least A
(Standard & Poor, Fitch) or A2 (Moody's);
• Securities and bonds issued by international (supranational) financial institutions (including but
not restricted to World Bank, European Bank for Reconstruction and Development, Asian
Development Bank);
• Debt issued in the form of securities by commercial banks and other financial institutions which
have long-term credit ratings of at least A (Standard & Poor, Fitch) or A2 (Moody's).
• In the case that a portion of the Oil Fund's foreign currency assets is managed by an external
manager, such an investment portfolio may comprise other investment assets, including corporate
debt and equities in addition to those listed above. External managers shall have a credit rating of
not less than AA- (Standard & Poor, Fitch) and Aa3 (Moody's).
Restrictions on investments
• currency arbitrage, swaps, forwards and futures (except for the purpose of hedging or optimizing
the currency composition of the investment portfolio and structure of the Oil Fund assets)
• real estate
The Oil Fund's officials and officers’ professional behavior
The Oil Fund's officials and officers’ professional behavior in the process of Fund assets management shall
comply with ethical norms and rules of conduct established by the ACI Code of Conduct issued by the
Financial Markets Association (Paris), and avoid any conflict between personal interests and their duties as
the Fund staff.
4.D: Rules on the Preparation and Execution of the Annual Budget for the
State Oil Fund of the Republic of Azerbaijan
These Rules have been prepared in accordance with the "Regulations (Statute) on the State Oil Fund of the
Republic of Azerbaijan" approved by the Decree of the President of the Republic of Azerbaijan No. 434
dated December 29, 2000 and determine the arrangements for the preparation, approval and execution of
the annual program of revenues and expenditures (hereinafter referred to as a budget) of the State Oil Fund
of the Republic of Azerbaijan (hereinafter referred to as the Oil Fund).
Appendix 4: The State Oil Fund of the Republic of Azerbaijan (SOFAZ) 185
1. GENERAL PROVISIONS
1.1. The Oil Fund's budget means an annual financial program that is prepared to ensure the
implementation of the Oil Fund's objectives and functions in compliance with the legislation of the
Republic of Azerbaijan, and reflects the Oil Fund's revenues and expenditures.
1.2. The Oil Fund budget shall be prepared for each financial year and shall cover the period starting
on the first of January and ending on the thirty-first of December.
1.3. The preparation and execution of the Oil Fund's budget shall be based on development and
implementation of a coherent macroeconomic policy and on the principle of the consolidation of
revenues and expenditures of the consolidated government.
1.4. No expenditures from the Oil Fund shall be allowed unless the expenditures are in accordance
with the Oil Fund's budget.
2.1. The Oil Fund's budget consists of revenue items and expenditure items.
2.2. Disaggregation of the Oil Fund's budget into items shall be effected in compliance with the state
budget account classification of the Republic of Azerbaijan and shall be consistent with international
standards.
2.3. The revenue items of the Oil Fund's budget shall comprise the following:
2.3.1. Revenues generated from implementing agreements on exploration, development and
production sharing for oil and gas fields in the territory of the Republic of Azerbaijan including
the Azerbaijani sector of the Caspian Sea (Lake), as well as other agreements on oil and gas
exploration, development and transportation entered into between the State Oil Company of the
Republic of Azerbaijan or other authorized state body and investors:
2.3.1.1. Net revenues from the sale of hydrocarbons falling on the share of the Republic of
Azerbaijan (to deduct expenditures incurred for hydrocarbons transportation, customs
clearance and bank costs, marketing, insurance and independent surveyor fees and not to
include revenues falling on a participating interest or investment of the State Oil Company
of the Republic of Azerbaijan in a project if it is an investor, participant or a contracting
party of this project);
2.3.1.2. Oil and gas agreements signature and/or performance bonuses paid by investors to
the State Oil Company of the Republic of Azerbaijan or an authorized state body;
2.3.1.3. Acreage payments due to the State Oil Company and/or an authorized state body
of the Republic of Azerbaijan from investors for the use of contract area in connection
with oil and gas exploration and development;
2.3.1.4. Dividends and profit participation revenues falling on the share of the Republic of
Azerbaijan in connection with oil and gas agreements implementation (not to include
revenues falling on a participating interest or investment of the State Oil Company of the
Republic of Azerbaijan in a project if it is an investor, participant or a contracting party of
this project);
2.3.1.5. Revenues generated from oil and gas pass over the territory of the Republic of
Azerbaijan with the use of Baku-Supsa, Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzerum
export pipelines;
186 Experiences with Oil Funds: Institutional and Financial Aspects
2.3.1.6. Revenues generated from transfer of assets from investors to the State Oil
Company and/or an authorized state body within the framework of oil and gas
agreements;
2.3.2. Revenues generated from placement and management of the Fund's assets, including
interest, dividend, asset revaluation and other revenues;
2.3.3. Grant and other free aid;
2.3.4. Other revenues and receipts in accordance with the legislation.
2.4. The expenditure items of the budget shall comprise the following:
• expenditures to finance the projects and social programs in compliance with the main directions
(program) of the Oil Fund's assets utilization;
• expenditures to finance the Oil Fund's operational expenses, including administrative (staffing)
expenditure, expenditure on employment of external consultants, assets revaluation expenses and
other expenses.
3.2. Preparation of a forecast for revenue items of the Oil Fund's budget
Appendix 4: The State Oil Fund of the Republic of Azerbaijan (SOFAZ) 187
3.2.1. The forecast of revenue items of the Oil Fund's budget which are generated from the
implementation of the Oil Agreements shall be prepared based upon analysis of global
hydrocarbon markets, research, forecasts and estimates of reputable specialized local and
international organizations and scientific-research centers, as well as reports and other data to
be submitted to the Oil Fund by the state bodies of the Republic of Azerbaijan in charge of
energy and economy. To this end the basic oil price indicators shall be coordinated between the
Oil Fund and the Ministry of Finance and while preparing the Oil Fund's budget the same
figures stipulated in the state budget shall be applied.
3.2.2. The forecast of revenue items of the Oil Fund's budget which are generated from the Oil
Fund's asset management shall be prepared based upon the provisions of the Oil Fund's asset
investment policy adopted within the framework of the Fund's assets utilization program.
3.2.3 The investment policy of the Oil Fund shall be prepared in compliance with its asset
management rules and be based upon financial market analysis and reports of reputable
international rating agencies, and, if necessary, making use of reputable foreign consultants. It
shall establish optimum economic return, low risk and conformity to the Oil Fund's
constitutional goals as the major guidelines and principles for the Fund's asset management.
3.4.2 The Oil Fund's budget preparation shall envisage the transfer of the full amount of the
difference between forecasted revenues and expenditures, if any, to the Oil Fund's asset
management portfolio (investment portfolio).
4.1. Every year at the latest by September 5 the draft Oil Fund's budget having been prepared in
coordination and on a consistent basis with the preparation of the draft State Budget of the Republic
of Azerbaijan shall be submitted by the Oil Fund's Executive Director to the OF Supervisory Board
for comments along with the following documents:
4.2. Every year at the latest by September 20 the draft Oil Fund's budget and the documents stipulated
in paragraph 4.1 above together with the Supervisory Board's opinion shall be submitted to the
President of the Republic of Azerbaijan for consideration.
4.3. Final coordination of the Oil Fund's budget with the State Budget and the approval of the Oil
Fund's budget shall take place after both documents comprising draft consolidated government's
revenues and expenditures have been considered by the President of the Republic of Azerbaijan
preceding the submission of the draft State Budget submission to the Milli Majlis (Parliament).
4.4. The Oil Fund's budget shall be approved not later than December 1 of each year.
4.5. If the draft Oil Fund's budget is not approved, for whatever reason, by December 31, the Oil
Fund is authorized to execute expenditures to cover expenditures of the Fund in the amount of 1/12
(one-twelfth) of actual expenditure for this purpose of the previous financial year for each month.
4.6. The Oil Fund's budget shall be published immediately upon approval.
5.1.5 All expenditures shall be executed in accordance with the purpose for which they were
approved.
5.1.6 If during the execution of the Oil Fund's budget revenues actually received exceed
forecast revenues or expenditures have not been executed in full for whatever reason, the
resulting excess amount shall not be spent but transferred in full to the Fund's investment
portfolio on a quarterly basis.
5.2 Execution of expenditure items relating to the Oil Fund's assets utilization program.
5.2.1. Expenditure items relating to the Oil Fund's assets utilization program shall be executed
through the State Treasury in compliance with the legislation in force and allowing for certain
provisions stipulated in these Rules.
5.2.2 The amounts transferred by the Oil Fund to the State Treasury shall not be used to finance
expenditures other than the expenditures for which they were originally allocated.
5.2.3 Procurement of goods (works and services) under the projects financed by the Oil Fund
shall be regulated by the legislation of the Republic of Azerbaijan.
5.2.4 The Oil Fund shall be authorized to exercise supervision over the use of the Oil Fund's
project finance related expenditures executed through the State Treasury, including the right to
request and receive the requisite data.
5.2.5 In order to enable the Oil Fund to produce quarterly and annual reports, the Ministry of
Finance shall submit reports on the execution of the Oil Fund's expenditures through the State
Treasury to the Oil Fund.
6.1 The Oil Fund shall produce quarterly reports on the Oil Fund's budget execution and submit them
to the Supervisory Board and the President of the Republic of Azerbaijan.
190 Experiences with Oil Funds: Institutional and Financial Aspects
6.2 The Oil Fund shall produce an annual report on the Oil Fund's budget execution and coordination
with the Ministry of Finance and submit it to the President of the Republic of Azerbaijan along with
the comments of the Supervisory Board at the latest by April 30 of the next financial year.
6.3 The approval by the President of the Republic of Azerbaijan of the Oil Fund's annual report on
the Oil Fund's budget execution shall take into account the opinion of a reputable international audit
firm on the Oil Fund's budget execution within the framework of the annual audit of the Oil Fund.
Appendix 5
Laws and Decrees Concerning Oil Revenue
Management in Chad
LOI N° 001/PR/99
PORTANT GESTION DES REVENUS PETROLIERS
Vu la Constitution,
L'Assemblée Nationale a délibéré et adopté en sa séance du 30 Décembre 1998 ;
Le Président de la République promulgue la Loi dont la teneur suit:
Article 1 : La présente Loi a pour objet de déterminer les modalités de gestion des revenus pétroliers
provenant de l'exploitation des trois (3) champs de KOME, MIANDOUM et BOLOBO.
Article 2: Les revenus pétroliers sont constitués par des ressources directes et des ressources indirectes ;
Article 3 : Les ressources directes citées à l'alinéa 2 de l’article 2 sont déposées sur le compte d'une
institution financière internationale spécialement ouvert pour l'Etat Tchadien et appelé compte séquestre
offshore.
191
192 Experiences with Oil Funds: Institutional and Financial Aspects
- 90% sont versées sur des comptes spéciaux du trésor logés dans une ou deux banques primaires de
la place ;
- Le reliquat de 10% est déposé dans un compte d'Epargne ouvert dans les conditions prévues à
l'article 9 de la présente Loi.
Article 4 : Les ressources indirectes, impôts, taxes et droit de Douanes, sont déposées directement sur les
comptes du Trésor Public.
Article 5 : Les différentes ressources citées à l'article 2 de la présente Loi sont intégralement inscrites au
Budget Général de l'Etat.
Article 6 : L'affectation des revenus est effectuée selon les critères définis au Chapitre II de la présente
Loi.
Article 8 : Les ressources directes, constituées des dividendes et des redevances déposées sur les comptes
spéciaux prévus a l'alinéa 2 de l’article 3 ci-dessus sont affectées de la manière suivante :
a) Quatre vingt pour cent (80%) sont destinés aux dépenses relatives aux secteurs prioritaires énumérés a
l'alinéa 2 de l'article 7 ;
b) Quinze pour cent (15%) sont destinées à couvrir les dépenses de fonctionnement et d'investissement
courants de l’Etat, pour une période de cinq ans à compter de la date de production.;
c) Cinq pour cent (5%) des redevances sont destinés aux collectivités décentralisées de la région
productrice conformément aux dispositions de l'article 212 de la Constitution;
Ce montant peut être révise par décret tous les cinq ans en fonction des ressources disponibles, des besoins
et de la capacité d'absorption de la région;
Appendix 5: Laws and Decrees concerning the Oil Laws in Chad 193
La gestion de ce fonds ainsi que les modalités de contrôle se feront conformément aux textes en vigueur en
matière de comptabilité publique.
SECTION 2 : DE L'EPARGNE.
Article 9 : Le reliquat de dix pour cent (10%) des ressources directes : redevances et dividendes
mentionnées a l'article 3 de la présente Loi est déposé sur un Compte d'Epargne ouvert dans une institution
financière internationale au profit des générations futures, conformément à la réglementation de la Banque
des Etats de l’Afrique Centrale (BEAC).
SECTION 1 : DU FONCTIONNEMENT.
Article 10 : Le mécanisme de gestion des comptes spéciaux, obéit à l'orthodoxie budgétaire de l'Etat à
savoir le respect des procédures d'approbation, de décaissement de suivi et de contrôle du budget général
de l'Etat.
Article 11 : Les comptes spéciaux sont logés dans une ou deux Banques Commerciales primaires de la
place certifiées par la COBAC. Ils sont directement alimentés par le compte séquestre prévu à l'article 3
alinéa 1 de la présente Loi.
Article 13 : Les demandes de décaissement de l'Ordonnateur du Budget Général de l'Etat doivent être
effectuées conformément aux procédures prévues par la Loi des Finances et être soumises a l'autorisation
expresse du Collège de Contrôle et de Surveillance des Ressources Pétrolières.
Article 17 : Les membres du CCSRP représentant le Parlement, la Cour Suprême, les ONG nationales et
les Syndicats sont désignés et nommés pour un mandat de trois (3) ans renouvelable une seule fois.
Article 19: Un Décret déterminera les modalités de fonctionnement, d'organisation et les conditions de
contrôle et de surveillance exercés par le CCSRP.
Article 21 : La Chambre des Comptes de la Cour Suprême exerce un contrôle de légalité des dépenses de
l'Etat par l'arrêt officiel des comptes des recettes et par le contrôle des dispositions légales sur la répartition
des ressources entre le Budget général de l'Etat et les collectivités décentralisées ainsi que des dispositions
régissant la Constitution des réserves ou le placement à l’étranger des ressources excédentaires.
Appendix 5: Laws and Decrees concerning the Oil Laws in Chad 195
- les audits annuels des comptes spéciaux et du Compte d'Epargne au profit des générations futures
;
- les rapports périodiques de gestion du Compte d'Epargne pour les générations futures et des
comptes d'épargne des éventuels surplus de financement ;
- les rapports périodiques du CCSRP ;
- les rapports et audits de la COBAC sur les banques primaires assurant la gestion des comptes
spéciaux spécifiques ;
- les audits annuels des comptes d'exécution du Budget Général de l'Etat établis par la Chambre des
Comptes.
Ces différents rapports et audits feront l'objet d'une publication annuelle par le Gouvernement.
LOI N° 016/PR/2000
Portant modification de la Loi n° 001/PR/99 du
11 Janvier 1999 portant Gestion des Revenus Pétroliers
Vu la Constitution ;
L’Assemblée Nationale a délibéré et adopté en sa séance du 26 Juillet 2000 ;
Le Président de la République promulgue la Loi dont la teneur suit:
Article 1 : La Loi n° 001PR/99 du 11 Janvier 1999 portant gestion des revenus pétroliers est modifiée
comme suit :
Au, lieu de
Article 16 (ancien) : Le CCSTP est composé de la manière suivante :
- Le Directeur du Trésor
- Le Directeur du Pétrole
- Le Directeur de la Planification et du Développement
- Un représentant des ONG locales
- Un représentant des Syndicats.
Lire :
Article 16 (nouveau) : Le Collège de Contrôle et de Surveillance des Ressources Pétrolières (CCRSP) est
un organe indépendant composé de la manière suivante :
Article 2 : La présente Loi sera enregistrée, publiée au journal Officiel de la République et exécutée
comme Loi de l’Etat.
Décret N° 238/PR/MEF/03
Vu la Constitution ;
Vu la Loi n° 006/PR/2001 du 20 avril 2001 portant ratification de l'accord de prêt en date du 29 mars 2001
entre la République du Tchad et la Banque Internationale pour la Reconstruction et le Développement pour
le projet d'Exploitation Pétrolière et d'Oléoduc ;
Appendix 5: Laws and Decrees concerning the Oil Laws in Chad 197
Vu les Accords de Coopération Monétaire signés entre les Etats membres de la BEAC et la République
Française du 23 novembre 1972 ;
DECRETE
Article 1 : Le présent Décret met en place un mécanisme de stérilisation des revenus pétroliers
provenant de l'exploitation des trois champs de Komé, Miandoum et Bolobo.
Article 2 : Le mécanisme de stérilisation a pour objet d'éviter toute situation susceptible de créer une
liquidité excessive dans l'économie et de mettre en péril la stabilité macroéconomique du pays.
Article 3 : Le rapatriement au Tchad des Revenus Pétroliers, à l'exclusion de ceux affectés au Fonds
pour les Générations Futures (10 pour cent des Revenus Pétroliers Directs) qui font l'objet d'une gestion
spécifique, à partir du compte séquestre offshore vers le compte spécial du Trésor auprès de la Banque
Commerciale, se fait à travers la BEAC, conformément à la réglementation des changes en vigueur dans la
Communauté Economique et Monétaire de l'Afrique Centrale (CEMAC).
Article 4 : Aux termes d'un contrat passé avec l'Etat, la Banque commerciale reverse dans un second
temps sur le Compte de répartition des revenus directs à la BEAC l'ensemble des montants reçus du compte
séquestre offshore. Le contrat liant la Banque commerciale à l'Etat pour deux années renouvelables prévoit
le montant de la commission versée à la Banque commerciale pour cette opération, et la rémunération des
dépôts sur le compte spécial du Trésor. Le contrat précise également que seuls les Revenus Pétroliers
directs pourront alimenter le Compte spécial du Trésor.
Article 5: Aux termes d'un contrat passé avec l'Etat, la BEAC répartit les montants des Revenus
pétroliers directs que la Banque commerciale a reversés dans le Compte de répartition des revenus directs
de la manière suivante:
* jusqu'au 31 décembre 2007, 15% du montant total reçu sera versé dans le compte courant du Trésor
ouvert à la BEAC ;
198 Experiences with Oil Funds: Institutional and Financial Aspects
* le solde restant est versé sur le compte de stabilisation à partir duquel la BEAC reverse à la Banque
commerciale tous les trimestres les montants nécessaires à l'exécution du budget, selon la programmation
financière de l'Etat.
- les montants à transférer du compte de stabilisation vers le compte spécial du Trésor sont communiqués
par l'Ordonnateur du Budget Général de l'Etat à la BEAC chaque trimestre ;
- que seuls les transferts vers le compte spécial du Trésor sont autorisés à partir du compte de
stabilisation ;
Article 7 : Les Revenus Pétroliers Indirects rapatriés au Tchad depuis le compte séquestre offshore
seront directement logés dans le compte courant du Trésor ouvert à la BEAC afin d'assurer la stérilisation
automatique de tous les revenus excédant les montants de dépenses financées sur Ressources budgétaires
non pré-affectées, programmées par l'Etat dans le cadre de l'exécution du budget.
Article 8 : Les définitions portées en annexe font partie intégrante du présent décret.
Article 9 : Le Ministre de l'Economie et des Finances est chargé de l'application du présent Décret
qui prend effet pour compter de la date de sa signature ; sera enregistré et publié au journal officiel de la
République.
Banque commerciale : la banque commerciale retenue, après consultation avec la Banque Mondiale
conformément aux dispositions de l'Accord de prêt en date du 29 mars 2001 entre la République du Tchad
et la Banque Internationale pour la Reconstruction et le Développement pour le projet d'Exploitation
Pétrolière et d'Oléoduc, ratifié par la Loi n° 006/PR/2001 du 20 avril 2001, sur la base d'un appel d'offres
restreint auprès des trois banques primaires les mieux cotées par la Commission Bancaire de l'Afrique
Centrale (COBAC) permettant d'obtenir le meilleur contrat, suivant les caractéristiques décrites à l'article 4
du présent Décret ;
Compte séquestre offshore : le compte ouvert auprès d'une institution financière internationale au nom de
l'Etat tchadien pour recevoir les revenus pétroliers, conformément à l'article 3 de la Loi n° 001/PR/99
modifiée par la Loi no 016/PR/2000, et au programme de Gestion des Recettes Pétrolières ;
Compte de stabilisation : le compte ouvert à la Banque des Etats de l'Afrique Centrale (BEAC) au nom de
l'Ordonnateur du Budget Général aux fins de stabilisation des dépenses dans les secteurs prioritaires,
conformément à l'article 5 du présent Décret ;
Appendix 5: Laws and Decrees concerning the Oil Laws in Chad 199
Compte spécial du Trésor : le compte ouvert dans la Banque commerciale au nom de l'Ordonnateur du
Budget Général pour loger les recettes pétrolières directes destinées au financement du Budget Général de
l'Etat ;
Compte de la région productrice : le compte ouvert à la Banque des Etats de l'Afrique Centrale (BEAC)
pour recevoir les revenus pétroliers directs alloués à la région productrice ;
Compte de répartition des revenus directs : le compte ouvert au nom de l'Ordonnateur du Budget
Général de l'Etat auprès de la Banque des Etats de l'Afrique Centrale (BEAC) pour recevoir l'ensemble des
revenus directs reversés par la Banque commerciale, et à partir duquel seuls les transferts vers le compte de
la région productrice, le compte de stabilisation et le compte courant du Trésor à la BEAC sont autorisés ;
Fonds pour les Générations Futures : le compte d'épargne dans lequel sont déposés au profit des
générations futures 10% des Revenus Pétroliers Directs, conformément à l'article 9 de la Loi n° 001/PR/99
modifiée par la Loi n° 016/PR/2000, et au programme de gestion des recettes pétrolières ;
Revenus Pétroliers Directs : l'ensemble des redevances et dividendes, conformément à l'article 2 de la Loi
n° 001/PR/99 modifiée par la Loi n° 016/PR/2000, et au programme de gestion des recettes pétrolières ;
Revenus Pétroliers Indirects : l'ensemble des impôts, taxes et droits de douanes liés à l'exploitation
pétrolière, conformément à l'article 2 de la Loi n° 001/PR/99 modifiée par la Loi n° 016/PR/2000, et à
l'Accord de prêt en date du 29 mars 2001 entre la République du Tchad et la Banque Internationale pour la
Reconstruction et Développement pour le Projet de l'Exploitation Pétrolière et d'Oléoduc ;
Revenus Pétroliers Directs pré-affectés : l'ensemble des Revenus Pétroliers Directs pré-affectés aux
dépenses additionnelles dans les secteurs prioritaires, conformément à la Loi n° 001/PR/99 modifiée par la
Loi n° 016/PR/2000, et au programme de gestion des recettes pétrolières, soit quatre vingt pour cent des
redevances et quatre vingt cinq pour cent des dividendes, après déduction des montants destinés au Fonds
pour les générations futures, auxquels s'ajoutent après le 31 décembre 2007 quinze pour cent des
redevances et dividendes, après déduction des montants destinés au Fonds pour les générations futures ;
Revenus Pétroliers Directs alloués à la région productrice : cinq pour cent des redevances, après
déduction des montants destinés au Fonds pour les générations futures, conformément à la Loi n°
001/PR/99 modifiée par la Loi n° 016/PR/2000, et au programme de gestion des recettes pétrolières ;
Ressources budgétaires non pré-affectées : l'ensemble des ressources budgétaires à l'exclusion des
Revenus Pétroliers Directs pré-affectés et des Revenus pétroliers directs alloués à la région productrice.
Banque commerciale : la Banque commerciale retenue, après consultation avec la Banque Mondiale
conformément aux dispositions de l'Accord de prêt en date du 29 mars 2001 entre la République du Tchad
et la Banque Internationale pour la Reconstruction et le Développement pour le projet d'Exploitation
Pétrolière et d'Oléoduc, ratifié par la Loi n° 006/PR/2001 du 20 avril 2001, sur la base d'un appel d'offres
restreint auprès des trois banques primaires les mieux cotées par la Commission Bancaire de l'Afrique
Centrale (COBAC) permettant d'obtenir le meilleur contrat, suivant les caractéristiques décrites à l'article 4
du présent Décret ;
Compte spécial du Trésor : le compte ouvert dans la Banque commerciale au nom de l'Ordonnateur du
Budget général pour loger les recettes pétrolières directes destinées au financement du Budget général de
l'Etat;
200 Experiences with Oil Funds: Institutional and Financial Aspects
Compte de stabilisation : le compte ouvert à la Banque des Etats de l'Afrique Centrale (BEAC) au nom de
l'Ordonnateur du Budget Général aux fins de stabilisation des dépenses dans les secteurs prioritaires,
conformément à l'article 5 du présent Décret ;
Consortium : le Consortium constitué des sociétés ESSO EXPLORATION AND PRODUCTION CHAD,
Inc., Petronas Carigali (Chad EP), Inc., et Chevron Petroleum Chad Company Ltd, qui sont parties à la
convention de Recherche, d'Exploitation et de Transport des Hydrocarbures signée avec la République du
Tchad le 19 décembre 1988 ;
Fonds pour les générations futures : le compte d'épargne dans lequel sont déposés au profit des
générations futures 10% des Revenus Pétroliers Directs, conformément à l'article 9 de la Loi n° 001/PR/99
modifiée par la Loi n° 016/PR/2000, et au programme de gestion des recettes pétrolières ;
Prix effectif: le prix du pétrole brut tchadien provenant des trois champs de Komé, Miandoum et Bolobo,
en francs CFA, utilisé pour valoriser la redevance sur la production versée en espèce par le Consortium ; il
est égal "au prix du marché départ champ" tel que défini à l'article 21.3 de la Convention de Recherche,
d'Exploitation et de Transport des Hydrocarbures entre la République du Tchad et le Consortium en date
du 19 décembre 1988 ;
Prix de référence : le prix du tchadien provenant des trois champs de Komé, Miandoum et Bolobo, en
francs CFA, utilisé dans les prévisions des revenus pétroliers du Budget Général de l'Etat. Ce prix est
estimé à partir des prévisions des Perspectives Economiques Mondiales du Fonds Monétaire International,
les plus récentes au moment de l'élaboration budgétaire, du prix du baril du brut de référence de Brent, du
cours du dollar américain par rapport à l'euro, et d'une estimation de la valorisation du pétrole de Doba et
du coût du transport. La valorisation est estimée par le Ministère en charge des affaires pétrolières en
application de son modèle de valorisation; le coût du transport est celui fixé dans le contrat le plus récent
conclu entre le Consortium, la Tchad Oil Transportation Company et la Cameroon Oil Transportation
Company, et approuvé par le Ministre en charge des affaires pétrolières, conformément aux dispositions de
l'article 14.9 de la Convention de Recherche, d'Exploitation et de Transport des Hydrocarbures entre la
République du Tchad et le Consortium en date du 19 décembre 1988 ;
Revenus pétroliers effectifs : les revenus pétroliers versés à l'Etat tchadien, valorisés au prix effectif .
Décret N° 239/PR/MEF/03
Vu la Constitution ;
Vu la Loi n° 006/PR/2001 du 20 avril 2001 portant ratification de l'accord de prêt en date du 29 mars 2001
entre la République du Tchad et la Banque Internationale pour la Reconstruction et le Développement pour
le projet d'Exploitation Pétrolière et d'Oléoduc ;
Vu le Décret n° 238/PR/MEF/03 du 1er Juillet 2003 portant mise en place du mécanisme de stérilisation
des Revenus Pétroliers ;
DECRETE
Article 1 : Le présent Décret met en place un mécanisme de stabilisation des dépenses financées au
moyen des revenus pétroliers provenant de l'exploitation des trois champs de Komé, Miandoum et Bolobo.
- d'assurer un financement stable aux dépenses de réduction de la pauvreté, et d'assurer leur soutenabilité
à long terme ;
- de promouvoir la discipline budgétaire et réduire la vulnérabilité des finances publiques aux chocs
extérieurs ;
- d'assurer le caractère additionnel des dépenses dans les secteurs prioritaires financées par les revenus
pétroliers directs pré-affectés.
Article 3 : Le principe de stabilisation repose sur l'utilisation de l'écart entre les ressources
budgétaires effectives et les dépenses inscrites au Budget Général de l'Etat.
Article 4 : La stabilisation des dépenses financées par les revenus pétroliers directs pré-affectés se
fait par l'utilisation d'un compte de stabilisation ouvert à la BEAC, dont l'alimentation se fait par l'excédent
de ces revenus sur les dépenses qu'ils financent suivant les dispositions de l'article 5 du décret n°
238/PR/MEF/03 portant mise en place du mécanisme de stérilisation des revenus pétroliers.
Article 5 : Tout excédent des ressources budgétaires non pré-affectées, sur les prévisions de
dépenses financées par ces mêmes ressources, est également épargné dans le compte courant du Trésor
ouvert à la BEAC.
Article 6 : Le montant prévisionnel versé au compte de stabilisation chaque année fait l'objet d'une
inscription à la Loi de finances au titre des transferts.
202 Experiences with Oil Funds: Institutional and Financial Aspects
- du cadre des dépenses à moyen terme, mis à jour chaque année, notamment à partir des conclusions des
revues des dépenses publiques.
Les prévisions des dépenses dans les secteurs prioritaires se feront de surcroît en fonction des budgets de
programmes mis à jour chaque année.
Les dépenses dans les secteurs prioritaires ne peuvent faire l'objet de mesures de gel ou de plafonnement en
cours d'exercice budgétaire.
Article 8 : L'existence d'un écart positif entre les revenus pétroliers directs pré-affectés effectifs et
revenus pétroliers directs pré-affectés de référence ne donne pas lieu à une révision du programme des
dépenses.
Revenus pétroliers de référence : les revenus pétroliers, valorisés au prix de référence. Ces revenus sont
calculés à l'aide du modèle de projection utilisé par une équipe conjointe du Ministère de l'Economie et des
Finances et du Ministère du Pétrole, la responsabilité de la détermination des recettes revenant en dernier
ressort au Ministère de l'Economie et des Finances. Dans un premier temps, dans l'attente de la
spécification d'un modèle de prévision tchadien, le modèle utilisé sera celui développé par le Consortium ;
Revenus Pétroliers Directs : l'ensemble des redevances et dividendes, conformément à l'article 2 de la Loi
n° 001/PR/99 modifiée par la Loi n° 016/PR/2000, et au programme de gestion des recettes pétrolières ;
Revenus pétroliers directs pré-affectés : l'ensemble des revenus pétroliers directs pré-affectés aux
dépenses additionnelles dans les secteurs prioritaires, conformément à la Loi n° 001/PR/99 modifiée par la
Loi n° 016/PR/2000, et au programme de gestion des recettes pétrolières, soit quatre vingt pour cent des
redevances et quatre vinqt cinq pour cent des dividendes, après déduction des montants destinés au Fonds
pour les Générations Futures, auxquels s'ajoutent après le 31 décembre 2007 quinze pour cent des
redevances et dividendes, après déduction des montants destinés au Fonds pour les générations futures ;
Revenus pétroliers directs alloués à la région productrice : cinq pour cent des redevances, après
déduction des montants destinés au Fonds pour les générations futures, conformément à la Loi n°
001/PR/99 modifiée par la Loi n° 016/PR/2000, et au programme de gestion des recettes pétrolières ;
Revenus Pétroliers Indirects : l'ensemble des impôts, taxes et droits de douanes liés à l'exploitation
pétrolière, conformément à l'article 2 de la Loi n° 001/PR/99 modifiée par la Loi n° 016/PR/2000, et à
l'Accord de prêt en date du 29 mars 2001 entre la République du Tchad et la Banque Internationale pour la
Reconstruction et Développement pour le Projet de l'Exploitation Pétrolière et d'Oléoduc ;
Ressources budgétaires non pré-affectées: l'ensemble des ressources budgétaires à l'exclusion des
Revenus pétroliers directs pré-affectés et des Revenus pétroliers directs alloués à la région productrice ;
Secteurs prioritaires : secteurs définis à l'article 7 de la Loi n° 001/PR/99 modifiée par la Loi n°
016/PR/2000, et dans le programme de gestion des recettes pétrolières.
Tout surplus est systématiquement épargné dans le compte de stabilisation, en sus de l'épargne éventuelle
initialement prévue au budget.
Appendix 5: Laws and Decrees concerning the Oil Laws in Chad 203
Article 9 : Au cas où les revenus pétroliers directs pré-affectés effectifs sont inférieurs aux
dépenses qu'ils doivent financer, l'écart est compensé par le recours à l'épargne constituée dans le compte
de stabilisation.
Article 10 : Au cas où les revenus pétroliers directs effectifs sont inférieurs de plus de 20 pour cent
aux revenus pétroliers directs de référence pendant plus de trois mois consécutifs, le cadrage
macroéconomique et le cadre des dépenses à moyen terme sont révisés, et le programme de dépenses ajusté
en conséquence.
Article 11 : La part, en terme d'allocation, des dépenses prioritaires financées par les ressources
budgétaires non pré-affectées dans l'ensemble des dépenses financées par ces mêmes ressources est au
moins égal à son niveau de 2002, soit 42,6 pour cent.
Article 12 : Le montant des dépenses dans les secteurs prioritaires financées par les ressources
budgétaires non pré-affectées qui ne seraient pas exécutées au cours d'un exercice budgétaire donné est
systématiquement rajouté au programme des dépenses établi suivant les principes définis ci-dessus de
l'exercice suivant.
Article 13 : Les définitions portées en annexe font partie intégrante du présent Décret.
Article 14 : La Chambre des Comptes de la Cour Suprême exerce un contrôle de légalité sur le
fonctionnement du compte de stabilisation des revenus pétroliers. Le Collège de Contrôle et de
Surveillance des Revenus Pétroliers (CCSRP) exerce un contrôle sur le fonctionnement du mécanisme de
stabilisation.
Article 15 : Le Ministre de l'Economie et des Finances est chargé de l'application du présent Décret
qui prend effet pour compter de la date de sa signature; sera enregistré et publié au Journal Officiel de la
République.
Banque commerciale : la banque commerciale retenue, après consultation avec la Banque Mondiale
conformément aux dispositions de l'Accord de prêt en date du 29 mars 2001 entre la République du Tchad
et la Banque Internationale pour la Reconstruction et le Développement pour le projet d'Exploitation
Pétrolière et d'Oléoduc, ratifié par la Loi n° 006/PR/2001 du 20 avril 2001, sur la base d'un appel d'offres
restreint auprès des trois banques primaires les mieux cotées par la Commission Bancaire de l'Afrique
Centrale (COBAC) permettant d'obtenir le meilleur contrat, suivant les caractéristiques décrites à l'article 4
du présent Décret ;
Compte spécial du Trésor : le compte ouvert dans la Banque commerciale au nom de l'Ordonnateur du
Budget Général pour loger les recettes pétrolières directes destinées au financement du Budget général de
l'Etat ;
Compte de stabilisation : le compte ouvert à la Banque des Etats de l'Afrique Centrale (BEAC) au nom de
l'Ordonnateur du Budget Général aux fins de stabilisation des dépenses dans les secteurs prioritaires,
conformément à l'article 5 du présent Décret ;
Consortium : le Consortium constitué des sociétés ESSO EXPLORATION AND PRODUCTION CHAD,
Inc., Petronas Carigali (Chad EP), Inc., et Chevron Petroleum Chad Company Ltd, qui sont parties à la
204 Experiences with Oil Funds: Institutional and Financial Aspects
Fonds pour les Générations Futures : le compte d'épargne dans lequel sont déposés au profit des
générations futures 10% des revenus pétroliers directs, conformément à l'article 9 de la Loi n° 001/PR/99
modifiée par la Loi n° 016/PR/2000, et au programme de gestion des recettes pétrolières ;
Prix effectif : le prix du pétrole brut tchadien provenant des trois champs de Komé, Miandoum et Bolobo,
en francs CFA, utilisé pour valoriser la redevance sur la production versée en espèce par le Consortium; il
est égal "au prix du marché départ champ" tel que défini à l'article 21.3 de la Convention de Recherche,
d'Exploitation et de Transport des Hydrocarbures entre la République du Tchad et le Consortium en date
du 19 décembre 1988 ;
Prix de référence : le prix du tchadien provenant des trois champs de Komé, Miandoum et Bolobo, en
francs CFA, utilisé dans les prévisions des revenus pétroliers du budget général de l'Etat. Ce prix est estimé
à partir des prévisions des Perspectives Economiques Mondiales du Fonds Monétaire International, les plus
récentes au moment de l'élaboration budgétaire, du prix du baril du brut de référence de Brent, du cours du
dollar américain par rapport à l'euro, et d'une estimation de la valorisation du pétrole de Doba et du coût du
transport. La valorisation est estimée par le Ministère en charge des affaires pétrolières en application de
son modèle de valorisation; le coût du transport est celui fixé dans le contrat le plus récent conclu entre le
Consortium, la Tchad Oil Transportation Company et la Cameroon Oil Transportation Company, et
approuvé par le Ministre en charge des affaires pétrolières, conformément aux dispositions de l'article 14.9
de la Convention de Recherche, d'Exploitation et de Transport des Hydrocarbures entre la République du
Tchad et le Consortium en date du 19 décembre 1988 ;
Revenus pétroliers effectifs : les revenus pétroliers versés à l'Etat tchadien, valorisés au prix effectif.
____________________________________________________________________________________
Appendix 6
Timor Leste Petroleum Fund
Preamble
This Act establishes a Petroleum Fund which seeks to meet with the constitutional requirement laid down
in Article 139 in the Constitution of the Republic. Pursuant to this provision, petroleum resources shall be
owned by the State, be used in a fair and equitable manner in accordance with national interests, and the
income derived therefrom should lead to the establishment of mandatory financial reserves.
The Petroleum Fund shall contribute to a wise management of the petroleum resources for the benefit of
both current and future generations. The Petroleum Fund shall be a tool that contributes to sound fiscal
policy, where appropriate consideration and weight is given to the long-term interests of Timor-Leste’s
citizens.
Efficient planning and proper execution of public sector budgets are key components of a sound
management of the petroleum wealth. The Petroleum Fund is to be coherently integrated into the State
Budget, and shall give a good representation of the development of public finances. The Petroleum Fund
shall be prudently managed and shall operate in an open and transparent fashion, within the constitutional
framework.
This Act lays down the key parameters for the operation and management of the Petroleum Fund. The Act
governs the collection of and management of receipts associated with the petroleum wealth, regulates
transfers to the State Budget, and provides for Government accountability and oversight of these activities.
Therefore, pursuant to Article 139 of the Constitution and for the purpose of establishing a fund of income
from the exploitation of non-renewable petroleum resources for the needs of both current and future
generations,
205
206 Experiences with Oil Funds: Institutional and Financial Aspects
The Government presents to the National Parliament, pursuant to paragraph c), item 1, Article 97, and
paragraph a), item 2, Article 115, of the Constitution of the Republic, the following draft law:
Article 2
Definitions
(a) “Central Bank” means the authority to be established under Section 143 of the Constitution of the
Republic or, until such authority is established, the Banking and Payments Authority;
(b) “Code” means the Petroleum Mining Code and the Interim Petroleum Mining Code agreed and
adopted by Timor-Leste and Australia under Article 7 of the Treaty, as amended, varied, modified
or replaced from time to time, and regulations made and directions given under it;
(c) “estimated sustainable income” for a fiscal year means the amount determined in accordance with
the formula set out in Schedule 1;
(e) “fiscal year” means the period of twelve (12) months from 1st July to 30th June;
(f) “independent auditor” means an internationally recognised accounting firm appointed for the
purpose of auditing the Government accounts as set out in the Timor-Leste law until the
Appendix 6: Timor Leste Petroleum Fund 207
(g) “investment manager” means the Central Bank and any person appointed as external investment
manager under Article 12;
(j) “payer” means any entity on whom there is an obligation pursuant to this present Act to make a
payment into the Petroleum Fund;
(k) “petroleum” has the same meaning given to it in the Petroleum Act;
(l) “Petroleum Act” means the Petroleum Act, 2005, as amended, varied, modified or replaced from
time to time, and regulations made and directions given under it;
(n) “Petroleum Fund” means the Petroleum Fund for Timor-Leste established under Article 5;
(q) “State Budget” means the State Budget referred to under Section 145 of the Constitution of the
Republic;
(r) “tax revenue” means any tax or duty imposed under Timor-Leste law;
(t) “Treaty” means the Timor Sea Treaty between the Government of Timor-Leste and the
Government of Australia signed on 20th May 2002, as amended, varied, modified or replaced
from time to time.
208 Experiences with Oil Funds: Institutional and Financial Aspects
2.2 All terms in the present Act that are defined in the Timor-Leste law on budget and financial
management have the same meaning given to it in that law.
Article 3
Scope of the Act
This Act shall provide for the establishment and management of the Petroleum Fund, and the procedural
rules relating thereto.
Article 4
Inconsistencies
For the purposes of this present Act, in the event of any inconsistency between the provisions of the Act
and the provisions in the law of Timor-Leste on budget and financial management, or between the
provisions of the Act and the terms of a petroleum authorization, the provisions of the present Act shall
prevail.
Article 5
Petroleum Fund for Timor-Leste
5.1 There is hereby established a fund known as the Petroleum Fund for Timor-Leste.
5.2 The Petroleum Fund shall have an earmarked receipts account, held by the Central Bank in compliance
with Articles 14 and 15, into which the Petroleum Fund receipts set out in Article 6 are credited.
5.3 Transfers from the Petroleum Fund shall be made only in accordance with Articles 7 to 10.
Appendix 6: Timor Leste Petroleum Fund 209
5.4 The details concerning the account referred to in Article 5.2, and the State Budget account referred to
in Article 7.1, shall be made public through the publication of the operational management agreement to
which Article 11.3 refers.
Article 6
Petroleum Fund Receipts
6.2 In the event that Timor-Leste participates in petroleum operations indirectly, as provided for in
paragraph (d) of Article 6.1, through a national oil company, the receipts of the Petroleum Fund shall
include the following:
(a) any amount payable by the national oil company as tax, royalty or any other due in accordance
with Timor-Leste law; and
(b) any amount paid by the national oil company as dividend.
6.3. From the amount received in accordance with Article 6.1, the Central Bank shall be entitled to deduct,
by direct debit of the Petroleum Fund account, any reasonable management expenses, as provided for in
the operational management agreement referred to in Article 11.3.
Article 7
Transfers
7.1 Subject to Article 6.3, the only debits permitted to the Petroleum Fund are electronic transfers made in
accordance with this present article, as well as Articles 8 to 10, to the credit of a single State Budget
account.
210 Experiences with Oil Funds: Institutional and Financial Aspects
7.2 The total amount transferred from the Petroleum Fund for a fiscal year shall not exceed the
appropriation amount approved by Parliament for the fiscal year.
7.3. Subject to Article 8 to 10, transfers from the Petroleum Fund by the Central Bank in the fiscal year,
shall only take place after publication of the budget law, or any subsequent changes thereto, in the Jornal
da República, confirming the appropriation amount approved by Parliament for that fiscal year.
Article 8
Requirements for Transfers
No transfer shall be made from the Petroleum Fund in the fiscal year unless the Government has first
provided Parliament with reports:
(a) specifying the estimated sustainable income for the fiscal year for which the transfer is made;
(b) specifying the estimated sustainable income for the preceding fiscal year; and
(c) from the independent auditor certifying the amount of the estimated sustainable income in
paragraphs (a) and (b).
Article 9
Transfers Exceeding the Estimated Sustainable Income
No transfer shall be made from the Petroleum Fund in a fiscal year in excess of the estimated sustainable
income for the fiscal year unless the Government has first provided Parliament with:
(a) the reports described in paragraphs (a) and (b) of Article 8;
(b) a report estimating the amount by which the estimated sustainable income for fiscal years
commencing after the fiscal year for which the transfer is made will be reduced as a result of the
transfer from the Petroleum Fund of an amount in excess of the estimated sustainable income of
the fiscal year for which the transfer is made;
(c) a report from the independent auditor certifying the estimates of the reduction in estimated
sustainable income in paragraph (b); and
(d) a detailed explanation of why it is in the long-term interests of Timor-Leste to transfer from the
Petroleum Fund an amount in excess of the estimated sustainable income.
Appendix 6: Timor Leste Petroleum Fund 211
Article 10
Transfers for Purposes of Refund of Tax
If required under the law of Timor-Leste, transfers from the Petroleum Fund are exceptionally permitted
for purposes of refund of tax, in the event of overpayment of tax under paragraph (a) of Article 6.1. This
amount represents a reduction of the Petroleum Fund receipts, and shall not be considered as part of the
appropriation approved under Article 7.2.
Article 11
Management of the Petroleum Fund
11.1 The Government is responsible for the overall management of the Petroleum Fund.
11.2 The Minister shall not make any decisions in relation to the investment strategy or management of the
Petroleum Fund without first seeking the advice of the Investment Advisory Board in accordance with
Article 16.
11.3 The Minister shall enter into an agreement with the Central Bank for the operational management of
the Petroleum Fund and the Central Bank shall be responsible for the operational management of the
Petroleum Fund.
11.4 The Petroleum Fund shall be managed prudently in accordance with the principle of good governance
for the benefit of current and future generations.
Article 12
External Investment Managers
12.1 The Central Bank may propose to the Minister, either of its own motion or at the request of the
Minister, the appointment of one or more external investment managers to be responsible for managing the
investment of amounts in the Petroleum Fund.
212 Experiences with Oil Funds: Institutional and Financial Aspects
12.2 The Central Bank may select and appoint an external investment manager proposed under Article 12.1
only if the Minister is satisfied that:
(a) the external investment manager is a legal person with sufficient equity capital and adequate
guarantees and insurances against operational risks;
(b) the external investment manager has a sound record of operational and financial performance; and
(c) the references and reputation of the external investment manager in the field of fund management
are of the highest standard.
12.3 The Central Bank shall be responsible for the tendering procedures required for any appointment
made pursuant to Article 12.1, as well as for the contracting of any other professional services under the
operational management agreement referred to in Article 11.3, and shall in doing so comply with the
substantive provisions of Timor-Leste law.
12.4 The procedures for terminating a contract with an external investment manager shall be laid down in
the operational management agreement referred to in Article 11.3.
12.5 The duty of the investment manager is to maximise the return on the Petroleum Fund investments
having regard to appropriate risk as indicated by the investments permitted under Articles 14 and 15, any
subsidiary legislation under this Act, any instructions by the Minister and the operational management
agreement referred to in Article 11.3.
Article 13
Quarterly Reports on the Petroleum Fund
13.1 The Central Bank shall present to the Minister quarterly reports on the performance and activities of
the Petroleum Fund no later than twenty (20) days after the end of each quarter.
13.2 The Central Bank shall provide for the publication of its reports no later than forty (40) days after the
end of the quarter.
13.3 The Central Bank shall ensure that in releasing, or allowing access to, such reports measures are taken
to prevent the disclosure of confidential information.
Appendix 6: Timor Leste Petroleum Fund 213
Article 14
Investment Rules
14.1 Not less than ninety per cent (90%) of the amounts in the Petroleum Fund shall be invested only in
qualifying instruments described in Article 15.
14.2 Not more than ten per cent (10%) of the amounts in the Petroleum Fund may be, in accordance with
all procedures laid down in this present Act, invested in financial instruments other than those mentioned
in Article 15.1, provided that such instruments are:
(a) issued abroad;
(b) liquid and transparent;
(c) traded in a financial market of the highest regulatory standard.
14.3 The range of instruments included as qualifying instruments in Article 15.1 shall be reviewed by the
Government, and approved by Parliament, at the end of the first five (5) years of the Petroleum Fund
existence, having regard to the size of the Petroleum Fund and the level of institutional capacity.
Article 15
Qualifying Instruments
15.1 Subject other provisions of this present article, a qualifying instrument is:
(a) a debt instrument denominated in United States Dollars that bears interest or a fixed amount
equivalent to interest, that is:
(i) rated Aa3 or higher by the Moody's rating agency or rated AA– or higher by Standard &
Poor’s rating agency; and
(ii) issued by or guaranteed by the World Bank or by a sovereign State, other than Timor-Leste,
provided the issuer or guarantor is rated Aa3 or higher by the Moody's rating agency or rated
AA– or higher by Standard & Poor’s rating agency; or
(b) a United States Dollars deposit with, or a debt instrument denominated in United States Dollars
that bears interest or a fixed amount equivalent to interest issued by:
(i) the Bank for International Settlements;
(ii) the European Central Bank; or
(iii) the Central Bank of a sovereign State, other than Timor-Leste, with a long-term foreign
currency rating of Aa3 or higher by the Moody’s rating agency or AA– or higher by the
Standard & Poor’s rating agency;
214 Experiences with Oil Funds: Institutional and Financial Aspects
(iv) a bank designated by Moody’s rating agency with a long-term foreign currency rating of Aa3
or higher or designated by Standard & Poor’s rating agency with a long-term foreign
currency rating of AA– or higher.
15.2 The investment manager shall dispose of an instrument if it ceases to be a qualifying instrument
because of a change in the rating of the instrument or the issuer of the instrument within one month of the
instrument ceasing to be a qualifying instrument.
15.3 The average interest rate duration of Petroleum Fund qualifying instruments under Article 15.1 shall
be less than six (6) years.
Article 16
Investment Advisory Board
16.1 There is hereby established an Investment Advisory Board that is responsible for:
(a) developing for the Minister performance benchmarks of desired returns from, and appropriate
risks of, the investments of the Petroleum Fund;
(b) advising the Minister on the investment instructions that the Minister shall provide to the
investment managers of the Petroleum Fund appointed pursuant to Article 12;
(c) advising the Minister on the performance of the external investment managers and making
recommendations to the Minister on the appointment or removal of external investment managers;
and
(d) advising the Minister on the need for changes in the overall investment strategy or management of
the Petroleum Fund, including the making of recommendations as to such changes.
16.2 Subject to Article 18, the Minister shall seek the advice of the Investment Advisory Board before
making a decision on any matter relating to the investment strategy or management of the Petroleum Fund.
16.3 Any advice given by the Investment Advisory Board on investment strategy or management of the
Petroleum Fund shall take into account:
(a) the overall objective that the Petroleum Fund be a fund of income from the exploitation of non-
renewable petroleum resources for the benefit of current and future generations;
(b) the current conditions, opportunities and constraints in investment markets, and the constraints
under which the Central Bank and other key institutions in Timor-Leste operate; and
Appendix 6: Timor Leste Petroleum Fund 215
(c) the need to ensure that sufficient amounts are available when needed for transfers referred to in
Article 7.
16.4 The Investment Advisory Board shall determine the rules of procedure under which it operates.
Article 17
Organisation of the Investment Advisory Board
17.2 The Central Bank shall provide the secretariat for the Investment Advisory Board and any support
required by the board to carry out its functions.
Article 18
Absence of Advice from the Investment Advisory Board
18.1 The non-provision of advice by the Investment Advisory Board, within fifteen (15) days of the
request, or within such longer time period as may be determined by the Minister having regard to the
nature of the advice sought, shall not constitute an impediment for the Minister to make a decision.
18.2 If, having regard to the nature and urgency of the decision to be taken, there is insufficient time to
seek the advice of the Investment Advisory Board, in relation to a particular decision, the Minister shall
make a decision without first seeking the advice of the Investment Advisory Board.
216 Experiences with Oil Funds: Institutional and Financial Aspects
18.3 If the Minister makes a decision under Article 18.1 or 18.2, the Minister shall immediately report the
making of the decision to the Investment Advisory Board.
18.4 The Minister shall reexamine the decision having regard to any subsequent advice provided by the
Investment Advisory Board.
Article 19
Release of Advices of the Investment Advisory Board
19.1 When required by Parliament, the Government shall without delay provide Parliament with all advices
given thereto by the Investment Advisory Board.
19.2 The Minister shall ensure that in releasing, or allowing access to, advices given thereto, measures are
taken to prevent the disclosure of confidential information.
Article 20
No Encumbrances on the Assets of the Petroleum Fund
20.1 Any amount that is invested pursuant to Articles 14 and 15 shall, at all times, remain the property of
Timor-Leste.
20.2 Any contract, agreement or arrangement, to the extent that it purports to encumber the assets of the
Petroleum Fund, whether by way of guarantee, security, mortgage or any other form of encumbrance, is
null and void.
Article 21
Appendix 6: Timor Leste Petroleum Fund 217
21.1 The Director of Treasury is responsible for maintaining the Petroleum Fund accounts and records in
accordance with the International Accounting Standards in force, to reflect the operations and financial
condition of the Petroleum Fund.
21.2 The Director of Treasury shall submit to the Minister quarterly management information reports and
analyses on the performance and activities of the Petroleum Fund no later than twenty (20) days after the
end of each quarter.
21.3 The Director of Treasury is responsible for reporting on the performance and activities of the
Petroleum Fund for the purpose of the annual financial statements of Timor-Leste.
Article 22
Internal Audit
The accounts, records and other documents relating to the Petroleum Fund shall be audited every six
months by the bodies responsible for internal audits of each of the entities involved.
Article 23
Annual Report
23.1 The Government shall submit an Annual Report for the Petroleum Fund for a fiscal year to
Parliament, at the same time as the annual financial statements of that year are submitted to Parliament.
23.2 The Annual Report referred to in Article 23.1 shall be published by Government within fifteen (15)
days of its submission to Parliament.
Article 24
Information Contained in the Annual Report
218 Experiences with Oil Funds: Institutional and Financial Aspects
24.1 The Annual Report for the Petroleum Fund shall be prepared in a manner that makes it readily
adaptable for public information, and shall contain in particular the following information for the fiscal
year for which the Report is prepared:
(a) audited financial statements certified by the independent auditor, comprising:
(i) an income and expenditure statement;
(ii) a balance sheet, including a note listing the qualifying instruments of the Petroleum Fund,
valued at market value;
(iii) details of all appropriations and transfers from the Petroleum Fund; and
(iv) notes to the financial statements, as appropriate;
(b) a report signed by the Minister describing the activities of the Petroleum Fund in the year,
including all advice provided by the Investment Advisory Board, any reports prepared by the
independent auditor under Article 35 and drawing attention to particular issues or matters that
may be of concern or interest to Parliament;
(c) a statement by the Director of Treasury drawing attention to any accounting issues or practices
arising from the Report that may materially affect the interpretation of amounts or activities
shown within it;
(d) the income derived from the investment of Petroleum Fund assets during the fiscal year compared
with the income of the previous three fiscal years;
(e) a comparison of the nominal income on the investment of Petroleum Fund assets with the real
return after adjusting for inflation;
(f) a comparison of the income derived from the investment of Petroleum Fund assets with the
benchmark performance indices provided to the Minister pursuant to Article 16.1;
(g) a comparison of the estimated sustainable income for the fiscal year with the sum of transfers
from the Petroleum Fund for the year;
(h) in the event of Government borrowings, the liabilities shall be reflected in the presentation of
Petroleum Fund accounts so as to give a true representation of the past and expected future
development of the Government’s net financial assets and rate of savings; and
(i) a list of persons holding positions relevant for the operation and performance of the Petroleum
Fund, including:
(i) the Minister;
(ii) the Director of Treasury;
(iii) the members of the Investment Advisory Board;
(iv) the external investment managers;
(v) the Head of the Central Bank; and
(vi) the members of the Petroleum Fund Consultative Council.
24.2 The sources of the information described in Article 24.1, whatever their form, and including all
reports and statements, shall be annexed to the Annual Report in unedited form.
Appendix 6: Timor Leste Petroleum Fund 219
Article 25
Petroleum Fund Consultative Council
25.2 The Petroleum Fund Consultative Council shall, of its own motion or at the request of Parliament:
(a) advise Parliament on matters relating to the performance and operation of the Petroleum Fund;
(b) advise Parliament on appropriations from the Petroleum Fund as set out in Article 30.2; and
(c) in the context of the budgetary process, advise Parliament on whether the appropriations of the
Petroleum Fund are being used effectively to the benefit of current and future generations.
Article 26
Composition of the Petroleum Fund Consultative Council
The Petroleum Fund Consultative Council shall comprise the following members, all of whom are
nationals of Timor-Leste:
(a) former Presidents of the Republic;
(b) former Speakers of the Parliament who have effectively been in office for at least three (3) years;
(c) former Prime Ministers who have effectively been in office for at least three (3) years;
(d) former Ministers in charge of finances who have effectively been in office for at least three (3)
years;
(e) former Heads of the Central Bank who have effectively been in office for at least three (3) years;
(f) two members appointed by Parliament, elected in accordance with the rules laid down by
Parliament;
(g) two members appointed to represent civil society non-profit organisations;
(h) a member appointed to represent the private business sector; and
(i) a member appointed to represent religious organisations.
220 Experiences with Oil Funds: Institutional and Financial Aspects
Article 27
Appointment, Tenure and Reeligibility of Members
27.1 The members of the Petroleum Fund Consultative Council referred to in paragraphs (a), (b) and (c) of
Article 26 are appointed, in accordance with procedures laid down by Parliament, from the end of their
term in office for a period of ten (10) years. These members are not eligible for reappointment.
27.2 The members of the Petroleum Fund Consultative Council referred to in paragraphs (d) and (e) of
Article 26 are appointed, in accordance with procedures laid down by Parliament, from the end of their
term in office for a period of five (5) years. These members are not eligible for reappointment.
27.3 The members of the Petroleum Fund Consultative Council referred to in paragraphs (f), (g), (h), and
(i) of Article 26 are appointed for a period of four (4) years. These members are eligible for reappointment
for a second term.
27.4 The members of the Petroleum Fund Consultative Council referred to in paragraphs (g), (h), and (i) of
Article 26 shall be freely appointed by the concerned organisations, duly registered in accordance with
Timor-Leste law, under procedures to be laid down by Parliament.
27.5 If no appointment can be made to the Petroleum Fund Consultative Council pursuant to paragraphs
(a), (b) or (c) of Article 26, the President of the Republic, the President of Parliament, and the Prime
Minister, respectively, shall appoint one member to fill such a vacancy.
Article 28
Limitations
28.1 A person shall not be appointed as a member of the Petroleum Fund Consultative Council if the
person:
(a) has been removed from office;
(b) has been declared bankrupt or insolvent; or
(c) has been convicted of a criminal offence.
28.2 Members of the Petroleum Fund Consultative Council have security of tenure and, unless otherwise
provided for by law, may not be suspended, retired or removed from office.
Appendix 6: Timor Leste Petroleum Fund 221
28.3 The appointment of a member of the Petroleum Fund Consultative Council ceases if the member:
(a) is declared bankrupt or insolvent;
(b) is convicted of a criminal offence; or
(c) is unfit for office.
28.4 Until such time as specific procedures for the removal of a member under paragraph (c) of Article
28.3 are established under the general law, the procedures applicable for the removal of judges shall apply.
Article 29
Economic Advisor to the Petroleum Fund Consultative Council
Subject to approval by Parliament, the Petroleum Fund Consultative Council may select and appoint as its
international adviser for economic and financial matters, for a period of two (2) years, an academic or
professional of the highest reputation and competence.
Article 30
Functioning of the Petroleum Fund Consultative Council
30.1 In conducting its activities, the Petroleum Fund Consultative Council shall take into account:
(a) the overall objective that the Petroleum Fund be a fund of income from the exploitation of non-
renewable petroleum resources for the benefit of current and future generations; and
(b) the principles for the operation of the Petroleum Fund as outlined in this present Act.
30.2 When:
(a) the Government introduces legislation to Parliament to appropriate an amount from the Petroleum
Fund, and
(b) the amount the legislation would appropriate in the fiscal year is greater than the estimated
sustainable income of the Petroleum Fund for the fiscal year,
the Petroleum Fund Consultative Council shall submit, in a timely manner, as decided by Parliament on a
case by case basis, an advice to Parliament on the Government’s proposed appropriation.
222 Experiences with Oil Funds: Institutional and Financial Aspects
30.3 The non-provision of advice by the Petroleum Fund Consultative Council, within the time period
decided by Parliament, shall not constitute an impediment for Parliament to make a decision.
30.4 For purposes of advising Parliament, the Petroleum Fund Consultative Council shall consult widely in
the community and, to this end, shall hold an annual forum on issues relating to the Petroleum Fund.
30.5 The Petroleum Fund Consultative Council shall determine the rules of procedure under which it will
operate, and its decisions shall not be binding unless taken by majority, with a quorum of six (6) members.
30.6 Parliament shall provide adequate funding for the operations of the Petroleum Fund Consultative
Council, including appropriate remuneration for members of the Petroleum Fund Consultative Council,
through the budgetary appropriation for the operation of Parliament.
Article 31
Release of Information
31.1 Parliament shall provide for the publication of the advices of the Petroleum Fund Consultative
Council, including minority opinions, within thirty (30) days of having been provided.
31.2 Parliament shall ensure that in releasing, or allowing access to, advices of the Petroleum Fund
Consultative Council, measures are taken to prevent the disclosure of confidential information.
31.3 The Minister and/or the Head of the Central Bank shall furnish the Petroleum Fund Consultative
Council with information it requests on any aspect of the operation or performance of the Petroleum Fund
for the purpose of its monitoring of the Petroleum Fund.
31.4 In dealing with the information furnished under Article 31.3, the Petroleum Fund Consultative
Council shall ensure that measures are taken to prevent the disclosure of confidential information.
Appendix 6: Timor Leste Petroleum Fund 223
Chapter VI – Transparency
Article 32
Transparency as a Fundamental Principle
32.1 The management of the Petroleum Fund shall always be carried out, and the related duties of all
relevant parties shall be discharged, with the highest standard of transparency.
32.3 Any information that is kept confidential at the time at which it could have been published, as well as
the reasoning for having been treated as confidential, shall be made available to the public, upon request,
when the reasons for confidentiality are no longer valid, and in any case after five (5) years from the date at
which it could have been published.
32.4 In the exercise of its functions and competences, and as provided for in this present Act, Parliament,
the Government, the Minister, Central Bank, Investment Advisory Board and the Petroleum Fund
Consultative Council shall take all necessary measures to ensure transparency mechanisms and free access
to public information.
32.5 The Minister shall ensure that this present Act, any subsidiary legislation made thereunder, any
instructions relating to the Petroleum Fund, the operational management agreement referred to in Article
11.3 and the reports referred to in Articles 8 and 9 are readily available to the public within thirty (30) days
of having been finalised.
224 Experiences with Oil Funds: Institutional and Financial Aspects
Article 33
Payments into the Petroleum Fund Account
For all purposes of Timor-Leste law, an obligation to make a payment into the Petroleum Fund shall not be
treated as discharged until the amounts have been deposited, integrally and unconditionally, into the
Petroleum Fund earmarked receipts account.
Article 34
Independent Auditor
34.1 Without prejudice to the jurisdiction of any court, there shall at all times be appointed an independent
auditor, which shall be an internationally recognised accounting firm, selected and appointed by the
Government.
34.2 The selection and appointment of the independent auditor shall be made in accordance with the
procurement procedures established under Timor-Leste law.
34.3 The independent auditor appointed under this present Act shall remain in function for the contracted
period, unless the contract is terminated for serious misconduct or serious breach of contract, or if the
independent auditor’s conduct otherwise prejudices the performance of the Petroleum Fund.
Article 35
Payments made as Petroleum Fund Receipts
35.1 The independent auditor shall prepare a report for the Minister of all payments made, or that should
under this present Act have been made, as Petroleum Fund receipts for each fiscal year.
35.2 The independent auditor may require any payer to provide any information, and to deliver proof of
any facts which may be necessary for the full discharge and performance of the independent auditor’s
duties under this present Act.
Appendix 6: Timor Leste Petroleum Fund 225
35.3 The independent auditor’s report shall state the aggregate amounts of payments made as Petroleum
Fund receipts for each payer for the fiscal year.
35.4 If the independent auditor concludes that there is a discrepancy between payments made and those
which should have been made, and which cannot be explained, the independent auditor shall refer the
matter to the Minister. In referring the matter to the Minister, the independent auditor shall provide all
information that the independent auditor possesses regarding the discrepancy in question.
Article 36
Reports of the Independent Auditor
36.1 The Minister shall provide for the publication of the independent auditor’s report, in particular
through the Annual Report.
36.2 The independent auditor shall ensure that in preparing the report measures are taken to prevent the
disclosure of confidential information.
Article 37
Scope of the Chapter
The provisions included in this Chapter are without prejudice of criminal and civil liability under general
law.
226 Experiences with Oil Funds: Institutional and Financial Aspects
Article 38
Non-Compliance with an Obligation to Publicise Information
Whoever fails to comply with any obligation to publicise information, provided for in this present Act, or
leads someone else to fail to comply with, or in any manner hinders or leads someone else to hinder the
compliance with, such an obligation, shall be punished by imprisonment for a period up to two (2) years or
fine of not less than fifty (50) days.
Article 39
Misleading Information
39.1 Whoever gives information that is materially false or misleading, or knowingly includes or permits to
be included, in any report or document, information that is materially false or misleading, shall be punished
by imprisonment for a period up to three (3) years or fine of no less than seventy five (75) days.
Article 40
Hindering the Exercise of Powers by an Auditor
40.1 Whoever, directly or indirectly, in any measure or by any means, hinders or leads someone else to
hinder the exercise of powers by an auditor under this present Act, shall be punished by imprisonment for a
period from three (3) months to four (4) years or fine of not less than one hundred (100) days.
Article 41
Accessory Penalties
In relation to the crimes provided for in this present Act, the following accessory penalties may be applied:
(a) Termination of contracts;
Appendix 6: Timor Leste Petroleum Fund 227
Article 42
Liability of Legal Persons, Corporations and Other Legal Entities
42.1 Legal persons, corporations or any other legal entities, including those without juridical personality,
are liable for contraventions provided for in this Part when committed by its organs or representatives in its
name and in the collective interest.
42.2 The liability is excluded where the agent has acted against express orders or instructions properly
issued.
42.3 The liability of the entities mentioned in Article 42.1 does not exclude the individual liability of the
respective agents.
42.4 The entities mentioned in Article 42.1 are jointly and severally liable, as provided for in civil law, for
the payment of any fines or compensations, or for the fulfillment of any obligations, derived from the facts
or with incidence on matters covered by the scope of this Act.
Article 43
Fines to Legal Persons, Corporations and Other Legal Entities
43.1 In the case of legal persons, corporations or any other legal entities, including those without juridical
personality, the daily rate for fines corresponds to an amount between one United States Dollars (USD
$1.00) and two thousand United States Dollars (USD $2,000.00), as determined by the court, taking into
account the economic and financial circumstances of the legal person, corporation or other legal entity.
43.2 If the fine is applied to an entity without juridical personality, its payment will be guaranteed by the
entity’s assets and, in the event of non-existence of such assets or under-capitalisation, jointly and
severally, the assets of each of the partners or shareholders of the entity.
228 Experiences with Oil Funds: Institutional and Financial Aspects
Article 44
Complaints to the Ombudsman for Human Rights and Justice
44.1 Any person, legal and natural, may lodge a complaint with the Ombudsman for Human Rights and
Justice, on any matters covered by the scope of this present Act, in accordance with general law.
44.2 Any recommendations forwarded by the Ombudsman for Human Rights and Justice to the competent
authorities, on any matters covered by the scope of this present Act, shall be treated as a matter of urgency.
Article 45
Subsidiary Legislation
General criminal law, both substantive and adjective, as well as the relevant administrative legislation, are
applicable in a subsidiary manner, with the required adaptations, to the extent necessary to give effect to
the provisions of this Chapter.
Article 46
Implementation of Organizational Structure
46.1 All appointments necessary for the effective functioning of the Investment Advisory Board shall be
made within three (3) months of the entry into force of this present Act.
46.2 All appointments necessary for the effective functioning of the Petroleum Fund Consultative Council
shall be made within six (6) months of the entry into force of this present Act.
Appendix 6: Timor Leste Petroleum Fund 229
Article 47
Subsidiary Laws and Regulations
The Government and the Minister may make regulations for the effective carrying out of the provisions of
this present Act, including regulations of a transitional nature consequent upon the making of this present
Act.
Article 48
Opening Balance of the Petroleum Fund
48.1 The opening balance of the Petroleum Fund is the total amount of the payments received by Timor-
Leste, up to the commencement of the present Act, as First Tranche Petroleum, from the Joint Authority
pursuant to the terms of the Exchange of Notes, or from the Designated Authority pursuant to the terms of
the Treaty, increased by such amount, if any, as determined by the Government.
48.2 A report on the determination of the opening balance of the Petroleum Fund shall be provided with
the first quarterly report presented under Article 13.
Article 49
Entry into force and application
49.1 This present Act enters into force on the day following its publication in the Jornal da República.
49.2 This present Act applies to fiscal years commencing on or after 1 July 2005.
49.3 Until the implementation of the organizational structure under this present Act is fully completed, and
in no case for a period of more than six (6) months starting from the date of entry into force of this present
Act, only the provisions that do not require the intervention of the organic structure to be constituted shall
apply.
230 Experiences with Oil Funds: Institutional and Financial Aspects
Schedule 1
Calculating estimated sustainable income for a fiscal year
I. Estimated sustainable income for a fiscal year is the maximum amount that can be appropriated from the
Petroleum Fund in that fiscal year and leave sufficient resources in the Petroleum Fund for an amount of
the equal real value to be appropriated in all later fiscal years as determined in accordance with the formula
in paragraphs II and III below.
II. Estimated sustainable income for a fiscal year is calculated according to the following formula:
r × petroleum wealth
where:
r is the estimated average real rate of return, or real interest rate, on Petroleum Fund
investments in the future and, for the purposes of these calculations, shall be 3.0%.
III. In this Schedule, “petroleum wealth” is calculated according to the following formula:
V + present value (R0, R1,…, Rn) = Error! Objects cannot be created from editing field codes.
where:
V is the estimated value of the Petroleum Fund at the end of the prior fiscal year
R0,R1, etc. are the published budget projections for expected annual Petroleum Fund receipts
minus investment returns for that fiscal year (R0) and future fiscal years (R1, etc.)
i is the estimated nominal yield on a U.S. government security, averaged over the years in
which Petroleum Fund receipts are expected
n is the number of years until no further Petroleum Fund receipts are projected to be
received.
Appendix 6: Timor Leste Petroleum Fund 231
IV. All assumptions upon which the calculations made pursuant to paragraphs II and III above are based
shall be clearly identified and explained, and any changes made in these assumptions in subsequent
calculations shall be clearly pointed out.
V. All assumptions made shall be prudent, reflect international best practice and be based upon
internationally recognized standards.
VI. The amount determined in accordance with the formula in paragraphs II and III above shall be certified
by the independent auditor.
This Agreement is made on [date] between the Minister for Planning and Finance (“Minister”) representing
the government and the Banking & Payments Authority (“Central Bank”), hereinto referred to as the
“Parties”, pursuant to Articles 11.3 and 12.4 of Law No. __/2005 on the Petroleum Fund (“Law”).
Whereas the Minister will exercise the key functions and competencies of the Government, which has been
assigned overall responsibility for the management of the Petroleum Fund (“Fund”) and the Banking and
Payments Authority has been assigned the responsibility of the operational management of the Fund;
Whereas the requirement established by law that the Minister shall enter into an agreement with the Central
Bank for the operational management of the Fund;
It is therefore agreed between the parties
1. The Central Bank shall undertake the operational management of the Fund and shall be
accountable for its operational management of the Fund to the Minister.
2. The Government shall be responsible for the overall management of the Fund, which shall include
the following functions to be exercised by the Minister:
a. To establish the overall policies and guidelines for the investment of the capital of the Fund,
and to issue such instructions to the Central Bank as may be required to allow the Central
Bank to implement the operational management of the Fund;
b. No less than fifteen (15) days prior to the commencement of each calendar quarter, to provide
a forecast of the monthly cash requirements of government for that quarter, including the
projected timings and amounts to be transferred from the Fund;
c. To provide the regulatory framework for the management of the Fund, and to consult with the
Central Bank concerning proposed changes to this framework;
d. To provide documentation as necessary to clarify the tax position of capital from the Fund that
has been invested abroad;
e. To ensure that requests by the Central Bank for guidance on ad hoc policy decisions to enable
232 Experiences with Oil Funds: Institutional and Financial Aspects
it to implement the operational management of the Fund are responded to clearly and in a
timely manner;
f. To consult with the Central Bank concerning information to be released to the public;
g. To appoint the independent auditors of the Fund and to arrange for their remuneration from
the State budget.
3. The Central Bank shall be responsible for the operational management of the Fund, which shall
include the following functions:
a. The investment of the capital of the Fund in financial instruments as set out in this Agreement,
including exercising all the rights and complying with all obligations associated with the
ownership of the Fund’s assets;
b. Receiving and accounting for the investment income and other revenues of the Fund;
c. Without prejudice to the responsibilities of the proper authorities for administering tax and
royalty payments, maintaining a register of all payments made as Petroleum Fund receipts;
d. Maintaining the books of account for the Fund on behalf of the Director of Treasury;
e. Appointing and dismissing banking correspondents, dealers, brokers, custodians and other
financial intermediaries necessary for the proper management of the Fund;
f. Acquiring and maintaining the information necessary to construct benchmark indices and
construct notional portfolios for policy development and reporting purposes;
h. Supplying information to the Minister and the Director of Treasury necessary for the drafting
of reports and statements relevant to the management of the Fund, including all reports
relating to the management of the Fund required by law, with all such information being
available to the recipients at least ten working days prior to any legislated publication date
unless otherwise agreed between the parties;
i. Meeting all the operational expenses relating to the management of the Fund, which shall be
compensated for from the annual management fee;
k. Advising the Minister of all significant events affecting the value of the Fund and other
matters considered to be urgent or of importance relating to the management of the Fund;
l. Providing the members of the public with such information concerning the Fund as may be
determined by the Minister;
m. Assisting the Minister in the preparation of the Annual Report of the Fund;
Appendix 6: Timor Leste Petroleum Fund 233
4. The Central Bank shall maintain the Secretariat of the Investment Advisory Board (“the Board”),
which shall include the following functions:
c. Preparation, in consultation with the Minister, of technical advice and recommendations to the
Board, including special reports on the operations of the Fund as may be requested by the
Board;
f. Administering the meeting expenses of the Board, including remuneration of the members, the
cost of which unless otherwise agreed shall be met from the State budget.
5. The Minister and the Central Bank shall jointly undertake the following functions with respect to
the Consultative Council (“the Council”):
a. Preparation of such technical advice and reports as may be requested by the Council in the
course of performing its duties;
b. Preparation of such commentaries on the operations and performance of the Fund as may be
requested from time to time by the Council.
6. The Central Bank shall implement the operational management of the Fund through the adoption
of the following principles:
a. The assets of the Fund shall be maintained in the name of the Central Bank, but shall at all
times be segregated from the assets of the Central Bank in such a manner as shall allow the
beneficial ownership of the assets and the income associated with those assets to be clearly
determined at any time;
b. The books and records of the Fund shall be maintained separately from the books and records
of the Central Bank to the maximum extent practicable;
c. The Central Bank shall make the books and records relating to the operational management of
the Fund available at any time on request to the Minister, staff authorised by the Minister, and
the auditors of the Fund.
d. The Central Bank shall ensure that all staff associated with the management of the Fund shall
be bound by a code of ethics and rules to avoid conflicts of interest.
7. The Central Bank shall be permitted to invest only in the qualifying instruments described in
Article 15.1 of the Law.
234 Experiences with Oil Funds: Institutional and Financial Aspects
8. The Minister shall determine the mandate set out in Annex 1 to this Agreement, and the Central
Bank accepts the mandate and shall undertake it to the best of its ability.
9. The performance of the Fund shall be measured periodically against the benchmark set out in
Annex 1, and will be the subject of periodic reports.
10. The Minister shall give the Central Bank at least four weeks’ notice before implementing any
change to the mandate or benchmark as set out in Annex 1, and the Central Bank shall advise the
Minister as to the anticipated length of time it will take to effect the new requirements.
11. The remuneration of the Central Bank shall be subject to Annex 2 to this Agreement, and shall be
payable in monthly instalments from the assets of the Fund.
12. The earmarked receipts account of the Fund required by Article 5.2 of the Law shall be account
number 021080973 held by the Central Bank at the Federal Reserve Bank of New York, with
further details as set out in Annex 3 to this Agreement.
13. The single state budget account referred to in Article 7.1 of the Law shall be account 2-3711 held
by the Ministry of Planning and Finance at the Central Bank.
14. The Central Bank shall undertake the appointment of external portfolio managers, under the
following conditions:
e. The Central Bank shall undertake the procurement process in a fair and transparent manner
according to its internal procedures;
f. The Central Bank shall make a written recommendation of the appointment to the Board,
including but not limited to information about the services to be provided, the proposed level
of fees, the proposed benchmark, the levels of insurance cover maintained against negligent
losses, and such information concerning the procurement process as is necessary to inform the
Board that the process was undertaken in accordance with the law;
g. The Minister shall issue a written decision to the Central Bank concerning the
recommendation to appoint the proposed portfolio manager;
h. The Central Bank shall enter into a contract with the portfolio manager in its own name.
15. Should the Central Bank wish to terminate the contract of an external portfolio manager, the
Central Bank shall consult with the Minister as follows:
a. The Central Bank shall provide a written recommendation to the Minister concerning the
termination of the portfolio manager’s contract, and send a copy to the President of the Board;
b. The Minister may, within five working days of receiving the recommendation, seek the advice
of the Board concerning the proposed termination of the portfolio management contract;
c. The Minister shall confirm in writing the decision within 30 working days of receiving the
Central Bank’s recommendation, failing which the Central Bank’s recommendation shall be
deemed to be approved.
Appendix 6: Timor Leste Petroleum Fund 235
16. The Central Bank shall not be liable for losses arising from the operations of the Fund unless such
losses arise from the negligence of the Central Bank or its employees.
17. The Minister shall provide with at least five working days’ notice written payment instructions to
transfer amounts from the Fund to the government’s account referred in Article 13, that shall
include the following information:
d. A statement that the provisions of Articles 8 to 10 of the Law have been complied with,
including such supporting documentary evidence as may be relevant;
18. All formal communications between the Minister and the Central Bank required under this
agreement shall be in writing, and the communications shall be delivered as follows:
Either party may at its discretion provide copies of formal communications to the Board.
19. This agreement may be amended by the parties at any time, provided that such amendments shall
not be effective except in writing and signed by both parties. The Minister shall at the Central
Bank’s request delay the publication of amendments to this agreement concerning changes in
portfolio allocations, benchmarks or other aspects that may affect the value of the Fund until the
Central Bank has substantially completed the related market operations.
20. The Minister may propose changes to this Agreement on the basis of advice received from the
Board after this body is established.
236 Experiences with Oil Funds: Institutional and Financial Aspects
1. QUALIFYING INSTRUMENTS
The assets of the Fund shall be invested in the classes of instruments as described below. The indices
indicated with each asset class shall be used to measure the performance of the Fund.
Debt instruments issued by the United States and other qualifying sovereign governments:
Index: Merrill Lynch 0-5 year government bond index
Short-term liquidity instruments maintained by the Fund limited to budgeted monthly appropriations from
the Fund to the state budget account described in Article 13 based on cash projections supplied to the
Central Bank by the Minister shall be excluded from the Fund for the purpose of benchmark comparison,
but the Central Bank shall otherwise be accountable for the return on these instruments.
2. MANDATE
1. The nature of the mandate established by the Minister shall be to passively manage the Fund close to
the benchmark, so that in normal circumstances the objective shall be to achieve a return within 25
basis points1of the benchmark.
2. The difference in the modified duration2 between the portfolio and the benchmark shall be less than
0.2 year.
To enable the orderly acquisition of suitable investments, the parameters in this Annex 1 shall apply only
from thirty (30) days after the date of entering into force of this Management Agreement.
Notes:
1. 100 basis points is the same as 1 percentage point.
2.
By “modified duration” is meant a measure of the percentage decline (increase) in the market value of the Petroleum
Fund due to a 100 basis point increase (decline) in the level of interest rates.
1. The remuneration of the Central Bank shall be calculated on the basis of the costs incurred with the
management of the Fund.
2. The upper limit for the remuneration thus calculated, for the 2005/06 fiscal year, shall be two hundred
and seventy thousand United States dollars (USD $270,000).
3. The remuneration may be drawn in monthly instalments from the assets of the Fund.
4. In addition to recovering costs limited to the value of remuneration set forth in paragraph 2 of this
Annex, the Central Bank shall receive remuneration for the portion of the fee to external investment
managers that is due to excess returns received.
Appendix 7
The São Tomé and Príncipe Oil Revenue Law
Preamble
The Democratic Republic of São Tomé and Príncipe shall soon be starting to receive oil revenues resulting
from the exploitation of its oil resources. Related to this reality are complex strategic matters that must be
anticipated, resolved and regulated so that such revenues can foster progress and sustainable social and
economic development in São Tomé and Príncipe.
Based on these principles, this law is adopted, guided by two fundamental ideas. The first idea is centered
on the payment and management of oil revenues. An attempt was made to address the concerns shown by
the international experience taking into account the national reality and the need for the Saotomean] people
to make strategic decisions regarding their future.
For that purpose an account is established – the National Oil Account – in which all oil revenues shall be
deposited directly, and mechanisms are introduced which are intended to ensure that such revenues will not
be used indiscriminately. Thus, limits are set forth for the use of the oil revenues, such limits not excluding,
however, the need to make decisions about spending on priority sectors on which expenditures will focus
and the respective revenue allocation.
Similarly, this law introduces mechanisms to prevent the revenues being channeled to other accounts.
Revenues may only be deposited in the State Treasury Accounts or in accounts established for that specific
purpose in the name of the State, as authorized by the National Assembly.
This law establishes quantitative and qualitative limits on the amount of oil revenues that shall be used for
annual budgetary expenditures. The quantitative limits define, in certain breadth, the maximum amount of
annual expenditures to be financed by oil revenues. The qualitative limits determine the basic principles for
the calculation of the annual expenditures within the maximum fixed limits, as follows: (I) planned and
forecasts of future revenues; and (II) absence of distortions in the economy.
The finite nature of oil resources was also taken into account, as well as the need to introduce mechanisms
that will allow São Tomé and Príncipe to face the post-petroleum era with minimum economic distress. For
that purpose, a reserve sub-account was established – the Permanent Fund of São Tomé and Príncipe – in
which part of the oil revenues shall be deposited, and whose use shall be strictly conditioned, except for the
earnings generated from investments of its funds. Thus, it is intended for the Saotomean people to continue
239
240 Experiences with Oil Funds: Institutional and Financial Aspects
to benefit from the yields generated by the investments of the reserve sub-account even after the oil
resources come to an end.
The management and investment of the oil revenues are assigned to an Investment and Management
Committee, which is the institution with the authority ascribed by law for that purpose. The Investment and
Management Committee shall act pursuant to the prudent investor rule, the principles established by this
law and by the management and investment policy.
This law introduces mechanisms to ensure the effective management and investment of oil revenues, and
establishes different priorities according to their allocation. All revenues allocated to finance public
expenditure shall be managed for immediate liquidity, while the revenues deposited in the permanent fund
shall be managed for medium- and long-term profitability. The management and investment policy, which
will guide revenue management and investment, shall reflect these principles.
The second fundamental idea of the law is centered on oil revenue management auditing, transparency and
oversight mechanisms, which are considered to be of great importance to ensure that this law be enforced
according to its objectives.
Two annual audits of the oil accounts, in which the oil revenues shall be deposited, shall be carried out:
one by the Auditor General and the other by an internationally recognized international auditing firm.
The law establishes clear transparency and publicity rules with respect to all acts and documents related to
the oil activity. On one hand, mechanisms are introduced that limit the confidentiality of contracts
concerning oil resources or oil revenues, mandatory registration and disclosure are introduced for all
documents and information related to the oil sector. On the other hand, all people have the ample rights to
access the information.
The law also creates a Petroleum Oversight Commission, with independence and administrative and
financial autonomy to ensure its effectiveness, with oversight, investigative and sanctioning powers.
Finally, this law clarifies that its dispositions apply to the Joint Development Zone; it establishes a range of
irreconcilable conflicts with regard to the exercise and placement in positions in the bodies created by the
law; and it aggravates by one third, in their minimums, the penalties established by the general law to
punish behaviors that violate the provisions of this law.
In these terms, the National Assembly sets forth, pursuant to Article 97(b) of the Constitution, the
following:
Appendix 7: The São Tomé and Príncipe Oil Revenue Law 241
Chapter I
Definitions and Scope of Application
Article 1
(Definitions)
1. For the purpose of this law:
a) “Administration” or “State Administration” – shall mean the direct, indirect, autonomous or independent
administration of São Tomé and Príncipe, including all ministries, entities, agencies, departments, offices,
institutes, services, support services to the sovereignty bodies, as well as local and regional branches of the
state and all their services, departments and all entities, companies and production unities controlled, in
whole or in part, directly or indirectly, by the central, regional or local administration;
b) “National Petroleum Agency” – shall mean the governmental legal entity with authority to regulate the
national petroleum industry;
c) “Official” or “State Administration Official” – shall mean any individual occupying any position in,
employed by, contracted by or otherwise acting on behalf of or representing the State Administration,
including ministers, directors, administrators, managers, attorneys-in-fact, commissioners or
concessionaires of any entities controlled by the Public Administration;
d) “Year” – shall mean the period between January 1st and December 31st;
e) “Business Association” – shall mean any permanent association of entrepreneurs or professionals
created in order to defend and promote their business or professional interests;
f) “Joint Development Authority” – shall mean the collective body established for the purposes described
in the Treaty;
g) “Central Bank” – shall mean the Central Bank of São Tomé and Príncipe, as established by Law
No.8/92, dated as of August 3, 1992;
h) “Custody Bank” – shall mean any financial institution, or its branches or agencies, in an international
foreign center, which is rated the highest by two internationally recognized risk analysis agencies, able to
receive and hold cash balances in an internationally convertible currency, act as the custodian itself or by
an Official, keep operation records of the National Oil Account, and provide to the public, directly or
through competent entities, the information subject to the transparency principle under the terms of this
law;
i) “Approved Bank” – shall mean any foreign commercial bank, or its branches or agencies, in an
international financial center, which is rated the highest by two internationally recognized risk analysis
agencies;
j) “Management and Investment Committee” – shall mean the committee organized to ensure the
management of the Oil Accounts and the investment of the oil revenues deposited in such accounts;
k) “Petroleum Oversight Commission” – shall mean the independent organization that ensures the
oversight of all the activities related to the national oil resources and revenues;
242 Experiences with Oil Funds: Institutional and Financial Aspects
l) “Oil Accounts” – shall mean the National Oil Account and the Permanent Fund of São Tomé and
Príncipe, when collectively referenced;
m) “Treasury Account” – shall mean any account or sub-account referred to as Public Treasury Account,
established by the Treasury with the Central Bank, pursuant to Decree No. 51/96, dated as of October 29,
1996;
n) “National Oil Account” – shall mean the account established and held by the Central Bank with the
Custody Bank, pursuant to this law;
o) “Oil Contracts” – shall mean transaction instruments having Oil Resources or Oil Revenues as an object;
p) “Abuja Joint Declaration” – shall mean the declaration regarding transparency and good governance
signed on June 26, 2004 by the Presidents of the Federal Republic of Nigeria and the Democratic Republic
of São Tomé and Príncipe;
q) “State” or “Saotomean State” – shall mean the Democratic Republic of São Tomé and Príncipe, as
defined in article 1 of the Constitution;
r) “Permanent Fund” or “Permanent Fund of São Tomé and Prícipe” – shall mean the subaccount
established with the Custody Bank, with the purpose of establishing a permanent savings reserve, pursuant
to paragraph 1 of Article 3, and to Article 10 of this Law;
s) “Public Registration and Information Office” – shall mean the public registration and information
service, as defined in Article 18 of this law;
t) “Natural gas” – shall mean all hydrocarbons that are gaseous at atmospheric pressure and temperature;
u) “Approved Foreign Government” – shall mean the government of any foreign country or any agency or
instrumentality of such foreign government, which is rated the highest by two internationally recognized
risk analysis agencies;
v) “Production Commencement” – shall mean the date on which the commercial production of
hydrocarbons shall commence in any block of the national territory, including the Exclusive Economic
Zone and the Joint Development Zone;
w) “Hydrocarbons” – shall mean the hydrocarbons as defined in the Treaty, the Treaty Regulations, and
sub-paragraph (m) of Article 1 of the Oil Activities Law;
x) “Oil Activities Law” – shall mean Law No. 4/2000, dated as of August 23, 2000, and all amendments
thereto;
y) “State General Budget” – shall mean the State General Budget as defined in Law No. 1/86, dated as of
December 31, 1986;
z) “Non-Governmental Organizations” – shall mean any association, organization, legal entity, foundation,
institution or company and other bodies deemed as legal entities represented in São Tomé and Príncipe,
non-for-profit, that predominantly pursue scientific, cultural, charitable, aid, social solidarity, social and
economic development, human rights protection, environmental protection goals, and other related goals;
aa) “Unrestricted Part of the National Oil Account” – shall mean the balance of the National Oil Account,
excluding the Permanent Fund of São Tomé and Príncipe;
Appendix 7: The São Tomé and Príncipe Oil Revenue Law 243
bb) “Person” – shall mean any individual or legal entity, whether national or foreign, resident or non-
resident of São Tomé and Príncipe;
cc) “Petroleum” or “oil” – shall mean all hydrocarbons that are liquid at atmospheric pressure and
temperature;
dd) “Management and Investment Policy” – shall mean the document containing the management and
investment rules for the Oil Revenues deposited in the Oil Accounts, pursuant to the principles set forth in
this Law;
ee) “Expected Average Prices” – shall mean the price calculated according to paragraph 1(a) of Article 7 of
this law;
ff) “International Reference Prices” – shall mean, for the period of ten years as from the Production
Commencement Year, the official price of hydrocarbons publicly rated by the Brent FOB Sullom Voe, and,
and for the seventh year after Production Commencement and subsequent years, the actual sale price of
crude oil in São Tomé and Príncipe, including the sales of hydrocarbons of the Joint Development Zone;
gg) “Oil Production” – shall mean the commercial production of oil or any other hydrocarbon in the
Exclusive Economic Zone or in the Joint Development Zone;
hh) “Field Development Program” – shall mean the detailed document, which, pursuant to the Treaty, the
Treaty Regulations or Oil Revenue Law, as the case may be, is submitted by an oil operator for the
establishment, construction and operation of facilities and services for the recuperation, processing, storage
and transportation of hydrocarbons in the contracted operator’s block;
ii) “Oil Revenue” – shall mean any payment or payment obligation owed by any Person to the State,
directly or indirectly, with respect to the oil resources of São Tomé and Príncipe, including, but not limited
to:
I) Any and all payments from the Joint Development Authority arising out of hydrocarbon-related
activities developed in, or in connection with, the Joint Development Zone;
II) All payments arising out of activities related to Exclusive Economic Zone Oil Resources, namely, but
not limited to São Tomé and Príncipe’s share of crude oil and gas sales; signature bonuses and
production bonuses; royalties; rents; proceeds from sale of assets; taxes; fees; duties and customs taxes;
public service fees; net profits of state-owned oil companies; revenues from State share rights in oil
contracts; crude oil sales; commercial activity resulting from transaction of oil, gas, or refined products;
return on investments of the oil revenues; any and all payments generated in connection with the
commercial production of hydrocarbons;
III) Other revenues of analogous nature or revenues deemed as having an analogous nature by law.
jj) “Extraordinary Oil Revenue” – shall mean, for the period after the Oil Production Commencement, any
signature bonus or any other payment, including the payments received from the Joint Development Zone
related to an area that is not yet in production;
kk) “Oil Resource” – shall mean any deposit, block or area where hydrocarbons can be found, regardless of
its commercial potential, within the national territory, including the Exclusive Economic Zone, and
pursuant to the terms of the Treaty, in the Joint Development Zone;
244 Experiences with Oil Funds: Institutional and Financial Aspects
ll) “Prudent Investor Rule” – shall mean that in performing any investment transactions or services, the
agent shall ensure high quality and efficiency standards, and shall discharge his or her duties protecting the
legitimate interests of the State with the diligence of a discerning and orderly manager, pursuant to the risk
sharing principle and the safety of the investments, in accordance with the investment rules approved by
the Management and Investment Committee pursuant to this Law;
mm) “Operation Rules” – shall mean the document containing the operation rules for the Oil Accounts;
nn) “Treaty Regulations” – shall mean the regulations approved by the competent authorities in accordance
with the Treaty;
oo) “Royalties” – shall mean the liquidated revenues from the sale or disposition of crude oil or natural
gas, as defined in the Treaty, in the Treaty Regulations and in the Oil Activities Law;
pp) “Long Term Real Rate of Return” – shall mean the rate calculated pursuant to paragraph 4 of Article 8
of this law;
qq) “Service Fee” – shall mean any charges for Oil Accounts administration, management and maintenance
services, as well as by the investments of the Oil Revenues deposited in such accounts;
rr) “Treaty” – shall mean the treaty dated as of February 21, 2001, between the Federaral Republic of
Nigeria and the Democratic Republic of São Tomé and Príncipe concerning the Joint Development Zone
for petroleum and other resources;
ss) “Union” – shall mean any permanent workers’ association formed to defend and promote their social-
professional interests;
tt) “Expected Present Value of Future Oil Revenues” – shall mean, for any period, the amount calculated
pursuant to paragraph 1(c) of Article 7 of this law;
uu) “Annual Funding Amount” – shall mean the amount to be transferred to the Treasury Account pursuant
to this Law;
vv) “Joint Development Zone” – shall mean the area defined for the purposes of the Treaty;
ww) “Exclusive Economic Zone” – shall mean the maritime area as defined by Law No. 1/98, dated as of
March 31, 1998.
2. The terms listed above may be used in the singular or in the plural, provided the adequate alteration,
unless the context clearly indicates otherwise.
Article 2
(Scope of Application)
This law shall regulate the payments, management, use and oversight of oil revenues resulting from oil
operations in the entire national territory, including its terrestrial and maritime areas, including the
Exclusive Economic Zone and the Joint Development Zone created by the Treaty.
Appendix 7: The São Tomé and Príncipe Oil Revenue Law 245
Chapter II
Oil Accounts
Section I
General Provisions
Article 3
(Establishment of Oil Accounts)
1. The Central Bank, acting in the name of the State, shall establish and hold the Oil Accounts with a
Custody Bank selected by the Government pursuant to this law.
2. The Central Bank shall deliver to the Custody Bank upon execution of the Oil Accounts opening and
management agreement the Operation Rules, which shall be an integral part of such agreement, and the
Treasury Account number into which the Annual Funding Amount shall be transferred.
Article 4
(Prohibition on Liens or Encumbrances)
1. Any and all acts are prohibited by the State or its Officials if such acts directly or indirectly create,
permit, assume, or promise the existence of public loans, public bonds, security interests or any other liens
or encumbrances relating to the Oil Accounts or any other Oil Resources, whether existing or future, or
related thereto.
2. The prohibition contained in paragraph 1 above shall not apply to financial charges in connection with
the maintenance and management of the Oil Accounts maturing no more than one year after the date on
which such lien is initially incurred.
3. Any attempt to violate paragraphs 1 and 2 above shall be null and void.
Article 5
(Operation Rules)
1. All transfers out of and in to the Oil Accounts shall be effected electronically.
2. The Central Bank shall prepare and present to the Government, who will submit to the National
Assembly for approval by statute the Operation Rules of the Oil Accounts, which shall include:
a) Authorization for transactions and transfers between the National Oil Account and the Permanent Fund;
b) Deadlines for transfers to the Oil Accounts;
c) Certification, registration and proof of transactions;
d) Authorizations for Oil Accounts investment transactions;
e) Payment of fees, commissions, emoluments, and other Service Fees for bank services and operations;
f) Other rules regarding deposits and remittance of oil revenues to the State.
3. Oil Accounts debt transactions will require signature of the following persons:
246 Experiences with Oil Funds: Institutional and Financial Aspects
Section II
National Oil Account
Article 6
(Deposits)
1. All monies owed to the State as Oil Revenue shall be deposited directly into the National Oil Account by
the Persons liable to pay such monies. The Central Bank and other institutions that are currently or in the
future in charge of the matter shall approve all necessary regulations and instructions.
2. Any Oil Revenue shall be considered paid by the Persons when fully and effectively deposited in the
National Oil Account.
3. Within 30 days from the date of submission of the calculations by the National Petroleum Agency
pursuant to this Article, the Petroleum Oversight Commission shall check if the calculations were done
according to the provisions of this law.
Article 8
(Determination of and Limits on the Annual Funding Amount)
1. The Government shall include in the proposed State General Budget an Annual Funding Amount that
shall be transferred out of the National Oil Account for the expenditures set forth in Article 9 of this law,
and which shall only be transferred out of the National Oil Account to the Treasury Account after the
definitive approval of the State General Budget.
2. The Annual Funding Amount for 2005 will be as set forth in the National State Budget as approved by
the National Assembly.
3. In the following years, the Annual Funding Amount shall be subject to the following limits:
a) Starting in 2006, for each Calendar Year until the end of the first Year after the Production
Commencement, the Annual Funding Amount shall not exceed the greater of the following amounts:
I) 20% of the balance of the National Oil Account on December 31, 2005, as estimated by the Central
Bank;
II) 20% of the total estimated balance of the National Oil Account at the end of previous Year, as estimated
by the Central Bank;
III) Each Year, after the date of announcement of commercial hydrocarbon discovery and after the
assurance of production, the amount equal to the total forecast balance for the National Oil Account at the
end of the immediately preceding Year, as estimated by the Central Bank, divided by the number of
remaining years until the end of the first Year after the expected Production Commencement Year.
b) For each Year starting with the second Year after the Production Commencement, the Annual Funding
Amount shall not exceed the lesser of the following amounts:
I) An amount equivalent to the sum of:
A) The Long Term Real Rate of Return multiplied by the balance of the Permanent Fund on June 30 of the
previous Year, and
B) The Long Term Real Rate of Return multiplied by the Expected Present Value of Future Oil Revenues
on June 30 of the previous Year.
II) An amount equivalent to the sum of:
A) The Long Term Real Rate of Return multiplied by the balance of the Permanent Fund on June 30 of the
previous Year, and
B) The balance of the unrestricted part of the National Oil Account on June 30 of the previous Year.
4. For the purpose of this Article, the Long Term Real Rate of Return shall be the Real Rate of Return
expected on a portfolio composed of assets proportionate to the assets held in the Permanent Fund during
the same period. The Long Term Real Rate of Return shall never exceed 5%. The inflation adjustment shall
248 Experiences with Oil Funds: Institutional and Financial Aspects
use the variation rates of the official price indexes of the currencies in which the Permanent Fund asset
portfolio is invested.
Article 9
(Allocation of the Annual Funding Amount)
1. The allocation of the Annual Funding Amount shall be decentralized with respect to sectors and
territory, and aimed at the elimination of poverty and the improvement of the quality of life of the
Saotomean people, the promotion of good governance, and social and economic development. In addition,
such allocation shall be used, namely, to strengthen the efficiency and effectiveness of the State
Administration, to ensure a harmonious and integrated development of the Country, a fair sharing of the
national wealth, the coordination between economic policy and social, educational and cultural policies,
rural development, preservation of the ecological balance, environmental protection, the protection of
human rights, and equality among citizens before the law.
2. The Annual Funding Amount may only be used pursuant to the policies and actions defined in a
national, regional or local development plan and a national poverty reduction strategy.
3. Should the policies, plans and strategies referred to in paragraph 2 above not be in place, the Annual
Funding Amount shall be allocated essentially and in first priority for the education, health, infrastructure
and rural development sectors, as well as in the strengthening of the State’s institutional capacity, as
proposed by the Government and approved by the National Assembly.
4. An amount not less than 7% of the Annual Funding Amount shall be annually reserved to the public
expenditures of the Autonomous Region of Príncipe.
5. An amount not less than 10% of the Annual Funding Amount shall be annually reserved for the State
share of local budgets, and shall be distributed pursuant to the Local Finance Law.
6. The allocation of the reserves provided in this article shall be part of the State General Budget. The
National Assembly shall approve budgetary and accounting procedures and mechanisms that are sufficient
to ensure efficient monitoring of such use.
7. The proposals for the allocation of the Annual Funding Amount shall be accompanied by explanatory
reports.
Section III
Permanent Fund of São Tomé and Príncipe
Article 10
(Permanent Fund)
1. No later than the first Production Commencement Year, the Central Bank shall establish a sub-account
of the National Oil Account that shall constitute the Permanent Fund, and whose transactions may only be
effected pursuant to the following paragraphs.
2. No later than January 31 of each year starting in the second Year after the Production Commencement,
and after the transfer from the National Oil Account of the Annual Funding Amount and the Service Fees
Appendix 7: The São Tomé and Príncipe Oil Revenue Law 249
owed, the balance of the National Oil Account on June 30 of the previous Year shall be transferred to the
Permanent Fund.
3. After the Production Commencement, any Extraordinary Oil Revenue deposited in the National Oil
Account shall be transferred to the Permanent Fund within 30 days from the date of such deposit.
4. No later than January 31, as from the second Year after the Production Commencement, an amount not
greater than the amount set forth in subparagraphs (b)(I)(A) and (b)(II)(A) of paragraph 3 of Article 8 of
this law may, if necessary, be transferred from the Permanent Fund to the National Oil Account for the
payment of the Annual Funding Amount.
5. Any and all transfers of Oil Revenues deposited in the Permanent Fund in violation of paragraph 4
above shall be prohibited and shall be null and void, without prejudice to the transfers explicitly and
exclusively authorized for investments pursuant to the Operation Rules and the Management and
Investment Policy.
Section IV
Management and Investment of the Oil Accounts
Article 11
(Management principles and rules)
The management and investments of the Oil Revenues deposited in the Oil Accounts shall be the
responsibility of a Management and Investment Committee, which shall act according to the Prudent
Investor Rule, following the principles and rules set forth in this law and in the Management and
Investment Policy.
Article 12
(Management and Investment Committee)
1. A Management and Investment Committee shall be established, chaired by the Minister of Planning and
Finance and also including the Governor of the Central Bank as the deputy chair, and three other members,
one appointed by the President of the Republic and the other two appointed by the National Assembly, one
of the latter appointed by the opposition parties.
2. The Persons appointed by the President of the Republic and the National Assembly shall be nationals,
individuals or legal entities, resident or legally represented in São Tomé and Príncipe, and shall have
proven previous experience in managing international investment portfolios.
3. Each one of the members appointed by the President of the Republic and the National Assembly shall
serve a two-year term commencing on the date of the respective appointment, renewable only once for an
identical period.
4. In case of vacancy, the new member shall commence a new term.
5. The Management and Investment Committee may only meet if the majority of its members is present,
and decisions shall depend upon the affirmative vote of at least three of its members.
250 Experiences with Oil Funds: Institutional and Financial Aspects
6. The members of the Management and Investment Committee, with the exception of the Minister of
Planning and Finance and the Governor of the Central Bank, shall be paid a fee to be fixed by the
Government, and shall receive no other remuneration other than reimbursement of previously authorized
expenses.
7. The Management and Investment Committee shall establish its internal operating rules, subject to the
approval of the National Assembly.
8. The State General Budget shall include an allocation for the annual budget of the Management and
Investment Committee.
Article 13
(Management and Investment Policy)
1. The Management and Investment Committee shall design and propose to the Government, which shall
submit it for approval by the National Assembly, the Management and Investment Policy which shall meet
the following objectives:
a) Sufficient investment liquidity to ensure the availability of cash for the Annual Funding Amount;
b) Maximum profitability of the Permanent Fund of São Tomé and Príncipe, subject to specified levels of
acceptable risk for the investment horizon;
c) Transparent, modern and diversified management of the financial assets that are part of the investment
portfolio of the Oil Accounts.
2. The Management and Investment Policy shall apply to each one of the Oil Accounts and shall include, at
a minimum:
a) The types of permitted investments, including categories of assets and instruments;
b) Minimum required ratings and classifications for permitted high-risk investments, based on
classifications proposed by expert firms of international reputation;
c) The rules relating to asset diversification by sector and issuer;
d) The rules to determine and monitor market risks, notably currency risks and interest rates risks;
e) The acceptable level of market value fluctuation during the term of the investment;
f) The rules established to ensure sufficient liquidity according to the Annual Funding Amount
requirements.
3. The National Oil Account investments shall be held only in internationally convertible currency, in the
form of the following instruments:
a) Cash bank deposits with an Approved Bank;
b) Negotiable direct obligations issued by any Approved Foreign Government;
c) Securities issued or directly guaranteed or insured by any Approved Foreign Government, maturing no
later than two years after the date of acquisition, provided that the full faith and credit of such Approved
Foreign Government is pledged in support thereof;
Appendix 7: The São Tomé and Príncipe Oil Revenue Law 251
d) Bankers’ acceptances, and floating rate certificates of deposit issued by the Approved Bank, maturing
no later than two years after the date of acquisition;
e) Investment funds, the assets of which shall comprise securities of the type described in sub-paragraphs
(a) and (c) above, regardless of the maturity date of such assets;
f) Other financial instruments of similar risk, profitability and liquidity to the ones referred to in the
preceding sub-paragraphs, as approved by the Management and Investment Committee.
4. The Management and Investment Committee may delegate to managers specialized in investments the
operational aspects of their powers and duties.
5. It is prohibited to invest the Oil Revenues deposited in the Oil Accounts in investments domiciled in São
Tomé and Príncipe, or in any investments controlled directly or indirectly, totally or partially, by any
national Person, whether or not resident of São Tomé and Príncipe, or who falls within the circumstances
described in paragraph 1 of Article 30 of this law.
Chapter III
Auditing
Article 14
(Annual Audits)
1. The management and activity of the National Oil Account, including all investments, deposits,
withdrawals and transfers, shall be subject to two annual audits, one by the Auditor General and the other,
external and independent, by an international auditing firm, and such audits shall be concluded within six
months of the end of each audited Year.
2. The audits referred to in paragraph 1 above shall assess compliance with this law and with other laws
relating to the financial administration of the State, the Investment Policy, the Operation Rules, as well as
all other rules relating to the Oil Accounts management and operation in the previous Year, namely, any
investments, deposits, withdrawals and transfers.
3. Audit reports shall be simultaneously sent to the President of the Republic, to the National Assembly, to
the Government, to the Petroleum Oversight Committee, to the São Tomé and Príncipe’s Solicitor’s Office
and to the Public Registration and Information Office, within 30 days upon completion, under the terms of
this Article.
4. The reports mentioned in paragraph 3 of this Article shall include, necessarily, all documents, notes and
observations that contribute to the full understanding of such reports.
Article 15
(Selection of the Auditing Firm)
1. The auditing firm shall be selected by the Petroleum Oversight Commission pursuant to competitive
public procurement open to internationally recognized accounting firms with international experience.
252 Experiences with Oil Funds: Institutional and Financial Aspects
2. Without prejudice to the requirements of paragraph 1 above, the competing audit firms shall present
proof of their technical competence to audit corporations listed in official stock markets, according to
international auditing and accounting standards.
3. The provisions of Article 22 shall be applicable accordingly.
Article 16
(Public Debate)
1. After the beginning of each legislative session, the National Assembly shall schedule and debate, in
separate plenary sessions, according to its internal organization:
a) General policy concerning hydrocarbons, to which members of the Government shall be present to
answer the Deputies’ questions and clarification requests;
b) The Oil Accounts audit reports, to which the ministries in charge of finance and hydrocarbons matters,
the members of the Management and Investment Committee, the Governor of the Central Bank, the
Auditor General, the President and the members of the Petroleum Oversight Commission, one
administrator from the external auditing firm that should have participated in the audit, the Executive-
Director of the National Petroleum Agency shall all be present and shall have the right to address the floor.
2. The topics mentioned in paragraph 1 above shall be discussed with civil society in public sessions
organized by the Petroleum Oversight Commission prior to the debates at the National Assembly.
Chapter IV
Public Integrity
Section I
Transparency and Publicity
Article 17
(Transparency)
1. All payments, management, use and investment of Oil Revenues or Oil Resources shall be subject to the
transparency principle.
2. The transparency principle implies disclosure of, and public access to, namely:
a) Payments and respective receipts, management, and debit and credit transactions, as well as balances of
the Oil Accounts;
b) The agreement for the opening and management the Oil Accounts entered into between the Central
Bank and the Custody Bank;
c) The distribution of revenues arising out of the oil activity carried out in the Joint Development Zone;
d) The Operation Rules of the Oil Accounts and any amendments thereto;
e) The forecast of Oil Revenues prepared by the National Oil Agency;
Appendix 7: The São Tomé and Príncipe Oil Revenue Law 253
f) All liens and encumbrances levying on the Oil Accounts, as permitted under paragraph 2 of Article 4;
g) Reports and other audit-related documents prepared by the Auditor General and the auditing firm with
respect to the management and execution of the Oil Accounts;
h) The Investment Policy concerning the Oil Accounts;
i) The annual report of the Petroleum Oversight Commission;
j) All budgets that benefit from transfers from the Annual Funding Amount, including the State General
Budget and the Joint Development Authority Budget;
k) All contracts relating to the participation of the State or any enterprise or entity owned or controlled in
whole or in part by the State, the scope of which directly or indirectly concerns activities related to Oil
Resources or Oil Revenues;
l) Conflict matters as described in Article 30, as well as related lawsuits and sanctions.
3. All activities subject to the transparency principle shall be made public through a website in the Internet
for inquiry purposes.
Article 18
(Public Registration and Information Office)
1. A Public Registration and Information Office shall be established, where all documents and information
about activities related to Oil Resources and to the management of the Oil Revenues mentioned in the
previous Article shall be filed, compiled, kept and made available to the public.
2. The documents and information referred to above shall be submitted for filing purposes to the entity in
charge of the organization and maintenance of the Public Registration and Information Office, by the
entities of the State Administration or Persons responsible for the elaboration, submission, receipt or
approval of such documents and information, within ten business days of the occurrence of the event
subject to registration.
3. The organization and maintenance of the Public Registration and Information Office shall be under the
responsibility of the National Assembly.
4. A special law shall regulate the establishment and operation of the Public Registration and Information
Office.
Article 19
(Publicity and Access to Information)
1. Information subject to transparency shall be conveyed in such a way that an addressee with basic
comprehension and knowledge can apprehend its meaning and scope, and such information shall:
a) Be presented in the Portuguese language;
b) Be complete, whole, clear, objective, truthful and current;
c) Be of universal and free access.
254 Experiences with Oil Funds: Institutional and Financial Aspects
2. Without prejudice to the universal and free access to information, the Government shall regulate the
forms of public disclosure and access, and shall establish the fees for the provision of certificates, shipping
or copies, as well as the time for the information to be obtained and the guarantees of the public access to
information.
Section II
Oil Contracts
Article 20
(Confidentiality Clauses)
1. Confidentiality clauses or other mechanisms included in Oil Contracts or in any other transaction
instrument concerning any Oil Revenue or Oil Resource that prevent or attempt to prevent access to
documents and information pursuant to Article 17 of this law shall be null and void, and contrary to public
policy.
2. Information concerning proprietary industrial property rights shall be exempted from the scope of
mandatory disclosure to the extent that confidentiality in such cases is protected by a national law, by the
Treaty, by the Treaty Regulations or by an international law.
3. In no case shall the provision of the above paragraph apply to any financial information.
4. Any Person intending to avail itself of the protection granted in the above paragraph shall have the
burden to prove its right to confidentiality protection pursuant to the rules of evidence applicable to
documents contained in the Civil Code.
Article 21
(Implicit contract clauses
1. All Oil Contracts or other transaction instruments concerning Oil Resources or Oil Revenues shall
contain, and in the absence thereof shall be construed to imply, the following provisions:
a) “No loan, reward, advantage or benefit of any kind has been given to any Official or to any person for
the benefit of such Official or person or third parties, as consideration for an act or omission by such
Official in connection with the performance of such person’s duties or functions or to induce such Official
to use his or her position to influence any acts or decisions of the Administration with respect to this
Agreement. Any breach of this representation shall cause this Agreement to be invalid and voidable by the
State Administration”;
b) “The validity and effectiveness of this agreement shall be subject to the full compliance with all
applicable administrative procurement rules relating to State contracting.”;
c) “This Agreement is elaborated and filed in the Portuguese and English languages, in case of non-
conformity, the Portuguese language version shall prevail.”;
d) “This Agreement shall be made public and a copy hereof shall be provided to the Public Registration
and Information Office within 10 days from its execution.”
Article 22
Appendix 7: The São Tomé and Príncipe Oil Revenue Law 255
(Public Competition)
1. All Oil Contracts or other transaction instruments to be entered into with the State Administration
concerning Oil Resources or Oil Revenues, services relating to Oil Resources or in any way related to the
oil sector or related activities, shall be preceded by public competitive tender pursuant to general law.
2. In the absence of legislation applicable to public tender, Oil Contracts or any other instruments
mentioned in paragraph 1 above shall be approved by the Petroleum Oversight Commission prior to
execution.
3. All Oil Contracts or other transaction instruments mentioned in paragraphs 1 and 2 above shall be made
public by the State or by any Person, no less than ten days prior to execution, without prejudice to the
terms of paragraphs 2, 3 and 4 of Article 20.
4. Oil Contracts and other transaction instruments entered into in violation of this Article shall be
considered void and without any effect, without prejudice to the liability of Officials and Persons
perpetrating such violation.
5. The provisions of this Article shall not exempt any Person or State Administration Official of any legal
obligation, except those obligations that are not consistent with this Article.
Chapter V
Ensuring Public Oversight and Enforcement
Section I
Petroleum Oversight Commission
Article 23
(Establishment of the Petroleum Oversight Commission)
1. A Petroleum Oversight Commission having legal entity status and administrative and financial
autonomy shall be established to ensure the permanent oversight of all payment, management and use of
the Oil Revenues and Oil Resources.
2. The Petroleum Oversight Commission shall be composed of eleven members, appointed or elected as
follows:
a) One member appointed by the President of the Republic;
b) Three representatives of the National Assembly, one necessarily appointed by the parliamentary groups
from the opposition;
c) One counselor judge with at no less than five years of professional experience, appointed by the
Superior Judiciary Council;
d) One representative from the Autonomous Region of Príncipe;
e) Two representatives from local governments;
f) One representative from Business Associations;
256 Experiences with Oil Funds: Institutional and Financial Aspects
Article 24
(Authority and Powers of the Petroleum Oversight Commission)
1. Without prejudice to the oversight powers provided by the law to other government bodies, the
Petroleum Oversight Commission shall have the authority to oversee the compliance of all activities with
this law, namely:
a) The verification and regularity of the expenditures of the Annual Funding Amount;
b) Management and investment of Oil Revenues, including the exchange operations to the credit and debit
of the Oil Accounts and their respective flow of funds in accordance with the Operation Rules and the
criteria defined in the Investment Policy;
c) The enforcement of the transparency rules;
d) The external auditing firm’s audit;
e) The certification of the Production Commencement date.
2. To carry out its duties, the Petroleum Oversight Commission shall have the power to:
a) Request relevant information and documents from any Person;
b) Inquire about violations of any nature related to Oil Resources or Oil Revenues;
c) Initiate investigations and inquiries based on its own knowledge or on third parties’ complaints of
irregularities or violations of the requirements of this law;
d) Carry out searches, inspections, and seizure of any documents or personal property that are the object,
tool, product of any infraction, or that are necessary to the opening of the respective process;
e) Present reports that may include detailed description of any act subject to oversight, the investigation
process, and inquiries initiated and closed, as well as recommendations as to the appropriateness of the
adoption of new procedures;
f) Hear, judge and enforce administrative proceedings and minor infractions consisting of violations of this
law;
g) Report to the competent authorities any irregularities or apparent violations of the provisions of this law
that are subject to disciplinary, civil or criminal sanctions;
h) Act as a party to judicial actions.
Appendix 7: The São Tomé and Príncipe Oil Revenue Law 257
Section II
Ensuring the Enforcement of the Law
Article 25
(Mechanisms for law enforcement)
The mechanisms to ensure the enforcement of this law shall be defined by a special law, which shall
regulate, in particular, the civil, criminal, and administrative responsibilities for acts performed in violation
of the requirements of this law.
Article 26
(Public Prosecutor’s Office and Police Authority)
1. Upon knowledge of violation of this law, the Public Prosecutor’s Office shall on its own motion initiate
judicial action to enforce the responsibilities of Officials or Persons pursuant to the Public Prosecutor’s
Office’s organic law, as well as criminal, civil, and other applicable law.
2. Police authorities shall cooperate as may be requested by the Petroleum Oversight Commission in the
exercise of its oversight functions.
Article 27
(Injunctions)
1. At any time prior to the issuance of a final decision, a governmental body with decisionmaking authority
shall on its own motion, or upon request, issue any necessary injunction in case of a justifiable fear of
grave injury to the public interest which would be difficult to repair.
2. Any decision to issue or amend any injunction shall set out the grounds therefor and the term of any
injunction shall be fixed.
3. The grounds for the revocation of any injunction shall also set out the grounds therefor.
4. The appeal of injunctions shall stay the effectiveness of the appealed decisions, except when the
appellate body shall determine otherwise.
5. Except as expressly provided otherwise, any injunction shall expire:
a) When a definitive decision is made;
b) If the fixed term of the injunction or its extension has expired;
c) If the deadline for a definitive decision has elapsed;
d) If the injunction is revoked by a judicial decision that becomes res judicata.
Article 28
(Court actions)
1. Any Person whose rights are protected under this law may appeal final decisions made by any
Administration body to judicial courts with jurisdiction.
258 Experiences with Oil Funds: Institutional and Financial Aspects
2. Any appeal filed pursuant to paragraph 1 above shall stay the appealed decision unless such stay results
in grave injury to public interest and the court so declares in a reasoned decision.
3. In the case of appeal of decision made by the Petroleum Oversight Commission in the exercise of its
oversight power, it is presumed that any stay of any Petroleum Oversight Commission’s decision
constitutes grave injury to public interest.
Chapter VI
Final Dispositions
Article 29
(Joint Development Authority)
1. Without prejudice to the provisions of the Treaty, the provisions of this law shall apply to all Oil
Revenues of the State arising out of the Joint Development Zone and all State Administration Officials or
any other Person employed, hired, or otherwise acting on behalf of or representing the Saotomean State
Administration in the Joint Ministerial Council or in the Joint Development Authority.
2. In particular, such Persons and Officials mentioned in paragraph 1 above shall act so as to implement,
jointly with the Federal Republic of Nigeria, the Abuja Joint Declaration as applicable to the Joint
Development Authority.
3. All information that shall be made public pursuant to the Abuja Joint Declaration shall also be made
public in accordance with paragraph 3 of Article 17 and paragraph 2 of Article 18 of this law.
4. In no case shall the State make any financial contribution to the budget of the Joint Development
Authority or carry out any other obligation under the terms of the Treaty, without the approval of the
National Assembly.
Article 30
(Conflicts)
1. No Person may be appointed or stay in office if such Person holds, directly or indirectly, on its own or
through a third party, any economic, financial, participatory or other interest in activity related to Oil
Revenues, or if such Person serves on boards, or is a representative, attorney-in-fact, agent or
commissioner of, or otherwise represents any Person in which the Oil Revenues deposited into the Oil
Accounts are held or invested.
2. Any Person in a situation described in paragraph 1 of this Article shall refuse his or her nomination, or
shall resign from the position he or she has been appointed to, as the case may be.
3. Any person or entity who nominates, appoints, accepts or serves terms with the State Administration
having knowledge of a conflict as described in paragraph 1 of this Article shall be punished with a fine
equivalent to three times the amount such Person earned as compensation from the time he or she engaged
in such activity until the time the conflict was uncovered.
Appendix 7: The São Tomé and Príncipe Oil Revenue Law 259
4. Any Official who, due to the interest or resulting from his or her appointment, receives directly or
through a third party, by any way or nature, an economic advantage from the violation of the provisions of
this Article, will be punished with a fine equivalent to three times the economic advantage received.
5. In addition to the fines prescribed in this Article, the Official shall disgorge to the State the amount
equivalent to the economic benefit including all proceeds earned by him or her or by a third party in
connection with the violation.
6. Attempted violations shall always be punishable with a fine equivalent to half of the fine established for
the consummated illegal act.
Article 31
(Violation of the law)
1. Until the law defined in Article 25 is approved, and without any prejudice to the penalties explicitly
prescribed by this law, any violations of this law that constitute either a crime or a misdemeanor shall have
their minimum terms increased by one third if related to Oil Resources or Oil Revenues.
2. For the purposes of this law, the daily fine is equivalent to the amount of three national minimum wages
in effect at the time when the action or omission occurs.
3. Any violations of the mandatory provisions of this law shall be void and shall not bind or produce any
legal effect against the State, except for the rights of bona fide third parties, as provided for and protected
under applicable law, and the liability of Officials.
Article 32
(Secondary Application)
Matters not specifically addressed in this law or in regulations pursuant to this law shall be subject to the
rules applicable to analogous matters specifically subject to this law and regulations pursuant to this law. In
the absence or insufficiency of rules in this law and in regulations pursuant to this law, such matters shall
be subject, by secondary application, to the provisions of the Oil Activities Law.
Article 33
(Effectiveness)
This law shall become effective five days after its publication in the Official Gazette.
Appendix 8
Venezuelan Law of the Investment Fund for
Macroeconomic Stabilization (1999)
Article 1: An investment fund is created without legal personality attached to the Central Bank of
Venezuela, which shall be known as the Investment Fund for Macroeconomic Stabilization, whose purpose
shall be to ensure that fluctuations in oil income do not affect the necessary fiscal, exchange and monetary
equilibrium of the country. The organization and operation of the Fund shall be governed by the provisions
of this Decree and its Regulations.
Article 2: The Board of the Central Bank of Venezuela shall act as the Board of the Investment Fund for
Macroeconomic Stabilization. The Board of the Fund shall exercise the highest level of control of the
Fund; in particular its powers shall be the following:
3) Approve the annual report of results of the Fund. Copy of said report shall be sent to the Congress of the
Republic within the fifteen days of approval.
5) Approve disbursements from the Fund in the cases established in this Decree.
6) Establish the investment policies and criteria for the resources of the Fund.
7) Others powers necessary to ensure the proper operating functions of the Fund and compliance with its
purpose.
Article 3: The resources of the Investment Fund for Macroeconomic Stabilization shall be constituted by:
a) Contributions that, in accordance with the provisions of Articles 4, 5 and 6 of this Decree, shall
be made by the Republic, the state entities and Petróleos de Venezuela, S.A.
b) Net income obtained as proceeds from the operations made with the contributions referred to in
the preceding letter.
d) Contributions by the National Executive other than those established in this Decree.
261
262 Experiences with Oil Funds: Institutional and Financial Aspects
Article 4: The National Executive shall transfer to the Investment Fund for Macroeconomic Stabilization
the following revenues, after deducting the amount corresponding to the constitutional appropriation [to
state and local governments], the share to be transferred to the state entities in accordance with the Law on
Special Economic Transfers to State Entities Derived from Mining and Hydrocarbons, and the portion of
revenue which, pursuant to the Organic Law for Creation of the Public Debt Retirement Fund, shall be
used for this latter fund:
a) Revenues from income tax incurred by taxpayers engaged in the activities specified in Article 9
of the Income Tax Law, received in excess of the average of said income collected in the last five
calendar years.
b) Revenues from the production tax on oil and gas received in excess of the average of said
income collected in last five calendar years.
c) Income from dividends declared and paid by Petróleos de Venezuela, S.A.. received in excess
of the average of said income collected in the last five calendar years.
d) Revenues from income tax incurred on the income received by Petróleos de Venezuela, S.A.
and its subsidiaries incorporated or domiciled in Venezuela, arising from the participation shares
paid by private pre-qualified companies to participate in bidding processes for the oil opening,
from the runoff bonds offered and paid by the winning companies, from the net profitability bonds
on projects (known as "PEG") paid on the basis of the percentage offered by the investors and
from any other similar items.
For purposes of this article, the National Executive shall acquire foreign exchange currency from the
Central Bank of Venezuela and shall transfer the resulting amount to the Investment Fund for
Macroeconomic Stabilization.
Article 5: The state entities shall transfer to the Investment Fund for Macroeconomic Stabilization the
resources received from the constitutional appropriation and from the special economic transfers, arising
from the revenue received by the Republic for the items and cases referred to in the preceding article.
For purposes of this article, the National Executive, with the portion of revenue applicable to each state,
shall acquire, for the account of each state, foreign exchange currency from the Central Bank of Venezuela
and shall transfer it to the Investment Fund for Macroeconomic Stabilization and shall inform the state
entities of the amount applicable to each of them transferred to the Fund.
Article 6: Petróleos de Venezuela, S.A. shall maintain in the Investment Fund for Macroeconomic
Stabilization the income from export of hydrocarbons and its products, after deducting only the related
taxes, arising from the increase in the export price of hydrocarbons and its products with respect to the
average export price of the last five calendar years. Similarly, Petróleos de Venezuela, S.A. shall maintain
in the Fund the extraordinary income received from the cases listed in letter d) of Article 4° of this Decree,
after deducting the related income tax. Petróleos de Venezuela, S.A. shall maintain ownership of these
funds.
For purposes of this article, Petróleos de Venezuela, S.A. shall transfer foreign exchange currency to the
Investment Fund for Macroeconomic Stabilization.
Article 7: The Investment Fund for Macroeconomic Stabilization shall maintain in separate accounts the
funds contributed by the Republic, the state entities and Petróleos de Venezuela, S.A., as well as the
proportional share of the income obtained from the investments made.
Appendix 8: Venezuelan Law of the Investment Fund
for Macroeconomic Stabilization (1999) 263
Article 8: After reaching the average level of income used as reference for determining the surplus income
that the National Executive shall transfer to the Investment Fund for Macroeconomic Stabilization, as well
as the resources that shall be maintained by Petróleos de Venezuela, S.A. in the Fund in accordance with
Articles 4, 5 and 6 of this Decree, the National Executive and Petróleos de Venezuela, S.A. shall evaluate,
during the first 30 calendar days of each quarter, if the income received during the immediately preceding
quarter corresponds to the cases specified in this Decree and if it is a consequence of a price increase in the
terms established therein, as the case may be, in which case the amounts applicable to the Fund shall be
transferred during the 60 calendar days following the expiration of the time limit indicated in this Article.
In the case of the funds referred to in letter d) of Article 4 of this Decree, the transfer to the Investment
Fund for Macroeconomic Stabilization shall be made during the 60 calendar days following their entry.
Article 9: The Investment Fund for Macroeconomic Stabilization shall sell foreign exchange currency to
the Central Bank of Venezuela and shall make the transfer of the resulting bolivares to the National
Treasury which, in turn, shall allocate up to 40% of said transfer to the Single Social Fund, when in
accordance with the relevant legal procedures, the revenue to be collected by the Republic is re-estimated
as a consequence of the following cases:
a) Reduction in revenue from income tax incurred by taxpayers engaged in the activities specified
in Article 9 of the Income Tax Law, with respect to the average of said income collected in the
last five calendar years.
b) Reduction in revenue from production taxes on oil and gas, with respect to the average of said
income collected in the last five calendar years.
Article 10: The Investment Fund for Macroeconomic Stabilization shall sell foreign exchange currency to
the Central Bank of Venezuela and shall make the transfer of the resulting bolivares to the respective state
entity, when in accordance with the relevant legal procedures the revenue to be received by the respective
state is re-estimated as a consequence of the following cases:
a) Reduction of revenue from the constitutional appropriation arising from the reduction in
revenue received by the Republic from income tax from taxpayers engaged in the activities
specified in Article 9 of the Income Tax Law with respect to the average of said income received
in the last five calendar years.
b) Reduction in revenue from the constitutional appropriation arising from the reduction in
revenue received by the Republic from the production tax on oil and gas with respect to the
average of said income received in the last five calendar years.
c) Reduction in income from the special economic transfers with respect to the average of said
income received in the last five calendar years.
The Investment Fund for Macroeconomic Stabilization shall transfer directly to the municipalities, in
accordance with the distribution indicated by the National Executive, the share that applies to them for the
constitutional appropriation arising from the funds mentioned in this Article.
Article 11: The Investment Fund for Macroeconomic Stabilization shall transfer foreign exchange
currency to Petróleos de Venezuela, S.A., when, in accordance with the decision of its Shareholders’
Meeting, export income from hydrocarbons and its products is re-estimated, as a consequence of the
reduction in the export price of said products with respect to the average export price of the last five
calendar years.
264 Experiences with Oil Funds: Institutional and Financial Aspects
Article 12: The transfer of funds by the Investment Fund for Macroeconomic Stabilization to the Republic,
the state entities and Petróleos de Venezuela, S.A. requires the prior opinion of the Finance Committee of
the Senate and the Chamber of Deputies of the Congress of the Republic acting jointly.
The opinion referred to in this Article shall be reported to the National Executive during the 20 business
days following the date of receipt of the request for opinion. If not sent by said time limit, the opinion shall
be considered favorable.
Article 13: The Board of the Investment Fund for Macroeconomic Stabilization shall approve the
disbursement of funds from the Fund after the National Executive reports on compliance with the cases and
conditions established in this Decree. Within one month from the decision adopted by the Board of the
Fund, the timetable for the transfer by the Fund shall be agreed with the respective entity.
Article 14: In all the cases stipulated in Articles 9, 10 and 11, the respective adjustments based on the
income actually received shall be made at the end of the respective fiscal year. In such case, the surplus
funds contributed by the Fund shall be returned to the Investment Fund for Macroeconomic Stabilization.
The refund shall occur within the three months following the date of determination by the Fund of its
origin.
Article 15: In the cases stipulated in Articles 9, 10 and 11, the contribution that the Investment Fund for
Macroeconomic Stabilization shall make to the respective entity shall not exceed the amount necessary to
cover the difference in revenue, on the understanding that the contributions made by the Fund during a
determined fiscal period may not be higher than two thirds of the balance of said Fund at the end of the
immediately preceding fiscal year.
Article 16: When the amount of the funds destined for the Investment Fund for Macroeconomic
Stabilization exceeds 80% of the amount equivalent to the average of the proceeds of the oil exports of the
last five calendar years, the surplus shall be distributed as follows:
b) The share applicable to the state entities shall be transferred to them exclusively for investment
spending.
c) The share applicable to Petróleos de Venezuela, S.A. shall be transferred to that company in the
terms established by the President of the Republic, in the Council of Ministers.
Article 17: For purposes of estimating the revenue of the National Executive in the Budget Law from the
production tax on oil and gas, from income tax levied on said activities and from dividends of Petróleos de
Venezuela, S.A., the National Executive shall establish as estimated revenue from these items the average
of the same for the last five calendar years.
Exceptionally, when the information available and the circumstances existing at the time of preparation of
the annual budget are such that it is desirable to establish as estimated revenue for the items referred to in
this Article a lower amount than the average for the last five calendar years, the National Executive shall
establish a lower amount as estimated revenue for such items in the Budget Law. The adjustment of the
estimate of revenue referred to in this Article shall consider, for purposes of determining its size, the
Appendix 8: Venezuelan Law of the Investment Fund
for Macroeconomic Stabilization (1999) 265
availability of funds in the Investment Fund for Macroeconomic Stabilization during the period of the
budget under consideration.
Article 18: The funds of the Investment Fund for Macroeconomic Stabilization shall be administered by
the Central Bank of Venezuela in accordance with the policies and criteria determined by the latter for the
management of the international reserves pursuant to the Central Bank Law. The resources of the Fund
shall not form part of the international reserves or of the net worth of the Central Bank of Venezuela.
Article 19: The Central Bank of Venezuela, against the respective payment, shall provide the services,
goods, personnel and other facilities necessary for the operation of the Investment Fund for
Macroeconomic Stabilization.
Article 20: The Investment Fund for Macroeconomic Stabilization shall not give guarantees, issue debt
instruments or undertake financial operations that represent indebtedness for the Fund. The Fund shall not
make direct loans to the Republic, state entities or Petróleos de Venezuela, S.A.
Article 21: For purposes of interpretation and calculation of all the provisions contained in this Decree, the
dollar of the United States of America is established as the unit of account.
Article 22: The operations of the Investment Fund for Macroeconomic Stabilization are exempt from
payment of all taxes, fees or contributions. The Fund shall enjoy all the privileges and prerogatives enjoyed
by the National Treasury.
Article 23: The provisions of other laws that conflict with this Decree shall not apply to the matters
regulated herein.
Article 24: For purposes of the application of Articles 4, 5, first part of 6, 9, 10 and 11 of this Decree, from
the entry into effect of the same until the 2004 fiscal year inclusive, instead of the parameter of the average
of the last five calendar years, the following bases shall be applied:
a) The amount of US$420 million as the average revenue referred to in letter a) of Articles 4 and
9.
b) The amount of US$967 million as the average of revenue referred to in letter b) of Articles 4
and 9.
c) The amount of US$1,254 million as the average of revenue referred to in letter c) of Article 4.
d) The amount of US$9 as the average referred to in Articles 6 and 11, considering the income
from export of hydrocarbons and its products.
e) The amount of US$105 million as the average referred to in letter a) of Article 10.
f) The amount of US$323 million as the average referred to in letters b) and c) of Article 10.
Article 25: For purposes of the application of Articles 4 and 5, the revenue from export of hydrocarbons
and its products, referred to in Article 6, during the fiscal years relative to the period from 1999 to 2004,
the parameters established in the preceding article shall also be used, but only an amount equivalent to 50%
of the total that exceeds said parameters shall be transferred or maintained in the Investment Fund for
Macroeconomic Stabilization.
Article 26: For the sole purpose of the application of Article 16 of this Decree, during the first five years
of its operation, the President of the Republic, in the Council of Ministers, may authorize use of the
revenue constituting the surplus alluded to in the first paragraph of said article, in accordance with the use
266 Experiences with Oil Funds: Institutional and Financial Aspects
established in all the letters, even before they reach the level mentioned in said provision, in accordance
with the provisions of Article 12 of this Decree.
Article 27: For purposes of application of Article 15 of this Decree, from its effective date until fiscal year
2004, the contribution that the Investment Fund for Macroeconomic Stabilization shall make to the
respective entity shall not exceed the parameters established in Article 24 of this Decree.
Article 28: Until the Single Social Fund referred to in Articles 9 and 16 of this Decree is created, the funds
allocated to the same shall remain in the Investment Fund for Macroeconomic Stabilization, in the account
of the Republic.
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272 Experiences with Oil Funds: Institutional and Financial Aspects
Joint UNDP/World Bank
ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP)
Africa Regional Anglophone Africa Household Energy Workshop (English) 07/88 085/88
Regional Power Seminar on Reducing Electric Power System
Losses in Africa (English) 08/88 087/88
Institutional Evaluation of EGL (English) 02/89 098/89
Biomass Mapping Regional Workshops (English) 05/89 --
Francophone Household Energy Workshop (French) 08/89 --
Interafrican Electrical Engineering College: Proposals for Short-
and Long-Term Development (English) 03/90 112/90
Biomass Assessment and Mapping (English) 03/90 --
Symposium on Power Sector Reform and Efficiency Improvement
in Sub-Saharan Africa (English) 06/96 182/96
Commercialization of Marginal Gas Fields (English) 12/97 201/97
Commercilizing Natural Gas: Lessons from the Seminar in
Nairobi for Sub-Saharan Africa and Beyond 01/00 225/00
Africa Gas Initiative – Main Report: Volume I 02/01 240/01
First World Bank Workshop on the Petroleum Products
Sector in Sub-Saharan Africa 09/01 245/01
Ministerial Workshop on Women in Energy 10/01 250/01
Energy and Poverty Reduction: Proceedings from a Multi-Sector 03/03 266/03
And Multi-Stakeholder Workshop Addis Ababa, Ethiopia,
October 23-25, 2002.
Opportunities for Power Trade in the Nile Basin: Final Scoping Study 01/04 277/04
Énergies modernes et réduction de la pauvreté: Un atelier
multi-sectoriel. Actes de l’atelier régional. Dakar, Sénégal,
du 4 au 6 février 2003 (French Only) 01/04 278/04
Énergies modernes et réduction de la pauvreté: Un atelier
multi-sectoriel. Actes de l’atelier régional. Douala, Cameroun 09/04 286/04
du 16-18 juillet 2003. (French Only)
Energy and Poverty Reduction: Proceedings from the Global Village
Energy Partnership (GVEP) Workshops held in Africa 01/05 298/05
Power Sector Reform in Africa: Assessing the Impact on Poor People 08/05 306/05
The Vulnerability of African Countries to Oil Price Shocks: Major 08/05 308/05
Factors and Policy Options. The Case of Oil Importing Countries
Angola Energy Assessment (English and Portuguese) 05/89 4708-ANG
Power Rehabilitation and Technical Assistance (English) 10/91 142/91
Africa Gas Initiative – Angola: Volume II 02/01 240/01
Benin Energy Assessment (English and French) 06/85 5222-BEN
Botswana Energy Assessment (English) 09/84 4998-BT
Pump Electrification Prefeasibility Study (English) 01/86 047/86
Review of Electricity Service Connection Policy (English) 07/87 071/87
Tuli Block Farms Electrification Study (English) 07/87 072/87
Household Energy Issues Study (English) 02/88 --
Urban Household Energy Strategy Study (English) 05/91 132/91
Burkina Faso Energy Assessment (English and French) 01/86 5730-BUR
Technical Assistance Program (English) 03/86 052/86
Urban Household Energy Strategy Study (English and French) 06/91 134/91
Burundi Energy Assessment (English) 06/82 3778-BU
Region/Country Activity/Report Title Date Number
2
Region/Country Activity/Report Title Date Number
3
Region/Country Activity/Report Title Date Number
4
Region/Country Activity/Report Title Date Number
Asia Regional Pacific Household and Rural Energy Seminar (English) 11/90 --
China County-Level Rural Energy Assessments (English) 05/89 101/89
Fuelwood Forestry Preinvestment Study (English) 12/89 105/89
Strategic Options for Power Sector Reform in China (English) 07/93 156/93
Energy Efficiency and Pollution Control in Township and
Village Enterprises (TVE) Industry (English) 11/94 168/94
Energy for Rural Development in China: An Assessment Based
on a Joint Chinese/ESMAP Study in Six Counties (English) 06/96 183/96
Improving the Technical Efficiency of Decentralized Power
Companies 09/99 222/99
Air Pollution and Acid Rain Control: The Case of Shijiazhuang City 10/03 267/03
and the Changsha Triangle Area
Toward a Sustainable Coal Sector In China 07/04 287/04
Demand Side Management in a Restructured Industry: How
Regulation and Policy Can Deliver Demand-Side Management
Benefits to a Growing Economy and a Changing Power System 12/05 314/05
Fiji Energy Assessment (English) 06/83 4462-FIJ
Indonesia Energy Assessment (English) 11/81 3543-IND
Status Report (English) 09/84 022/84
Power Generation Efficiency Study (English) 02/86 050/86
Energy Efficiency in the Brick, Tile and
Lime Industries (English) 04/87 067/87
Diesel Generating Plant Efficiency Study (English) 12/88 095/88
Urban Household Energy Strategy Study (English) 02/90 107/90
Biomass Gasifier Preinvestment Study Vols. I & II (English) 12/90 124/90
Prospects for Biomass Power Generation with Emphasis on
Palm Oil, Sugar, Rubberwood and Plywood Residues (English) 11/94 167/94
Lao PDR Urban Electricity Demand Assessment Study (English) 03/93 154/93
Institutional Development for Off-Grid Electrification 06/99 215/99
Malaysia Sabah Power System Efficiency Study (English) 03/87 068/87
Gas Utilization Study (English) 09/91 9645-MA
Mongolia Energy Efficiency in the Electricity and District
Heating Sectors 10/01 247/01
Improved Space Heating Stoves for Ulaanbaatar 03/02 254/02
Impact of Improved Stoves on Indoor Air Quality in
Ulaanbaatar, Mongolia 11/05 313/05
Myanmar Energy Assessment (English) 06/85 5416-BA
5
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Papua New
Guinea Energy Assessment (English) 06/82 3882-PNG
Status Report (English) 07/83 006/83
Institutional Review in the Energy Sector (English) 10/84 023/84
Power Tariff Study (English) 10/84 024/84
Philippines Commercial Potential for Power Production from
Agricultural Residues (English) 12/93 157/93
Energy Conservation Study (English) 08/94 --
Strengthening the Non-Conventional and Rural Energy
Development Program in the Philippines:
A Policy Framework and Action Plan 08/01 243/01
Rural Electrification and Development in the Philippines:
Measuring the Social and Economic Benefits 05/02 255/02
Solomon Islands Energy Assessment (English) 06/83 4404-SOL
Energy Assessment (English) 01/92 979-SOL
South Pacific Petroleum Transport in the South Pacific (English) 05/86 --
Thailand Energy Assessment (English) 09/85 5793-TH
Rural Energy Issues and Options (English) 09/85 044/85
Accelerated Dissemination of Improved Stoves and
Charcoal Kilns (English) 09/87 079/87
Northeast Region Village Forestry and Woodfuels
Preinvestment Study (English) 02/88 083/88
Impact of Lower Oil Prices (English) 08/88 --
Coal Development and Utilization Study (English) 10/89 --
Why Liberalization May Stall in a Mature Power Market: A Review 12/03 270/03
of the Technical and Political Economy Factors that Constrained the
Electricity Sector Reform in Thailand 1998-2002
Reducing Emissions from Motorcycles in Bangkok 10/03 275/03
Tonga Energy Assessment (English) 06/85 5498-TON
Vanuatu Energy Assessment (English) 06/85 5577-VA
Vietnam Rural and Household Energy-Issues and Options (English) 01/94 161/94
Power Sector Reform and Restructuring in Vietnam: Final Report
to the Steering Committee (English and Vietnamese) 09/95 174/95
Household Energy Technical Assistance: Improved Coal
Briquetting and Commercialized Dissemination of Higher
Efficiency Biomass and Coal Stoves (English) 01/96 178/96
Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices
In Vietnam 02/01 236/01
An Overnight Success: Vietnam’s Switch to Unleaded Gasoline 08/02 257/02
The Electricity Law for Vietnam—Status and Policy Issues—
The Socialist Republic of Vietnam 08/02 259/02
Petroleum Sector Technical Assistance for the Revision of the 12/03 269/03
Existing Legal and Regulatory Framework
Western Samoa Energy Assessment (English) 06/85 5497-WSO
6
Region/Country Activity/Report Title Date Number
7
Region/Country Activity/Report Title Date Number
Armenia Development of Heat Strategies for Urban Areas of Low-income 04/04 282/04
Transition Economies. Urban Heating Strategy for the Republic
Of Armenia. Including a Summary of a Heating Strategy for the
Kyrgyz Republic
Bulgaria Natural Gas Policies and Issues (English) 10/96 188/96
Energy Environment Review 10/02 260/02
Central Asia and
The Caucasus Cleaner Transport Fuels in Central Asia and the Caucasus 08/01 242/01
Central and
Eastern Europe Power Sector Reform in Selected Countries 07/97 196/97
Central and
Eastern Europe Increasing the Efficiency of Heating Systems in Central and
Eastern Europe and the Former Soviet Union (English and
Russian) 08/00 234/00
The Future of Natural Gas in Eastern Europe (English) 08/92 149/92
Kazakhstan Natural Gas Investment Study, Volumes 1, 2 & 3 12/97 199/97
Kazakhstan &
Kyrgyzstan Opportunities for Renewable Energy Development 11/97 16855-KAZ
Poland Energy Sector Restructuring Program Vols. I-V (English) 01/93 153/93
Natural Gas Upstream Policy (English and Polish) 08/98 206/98
Energy Sector Restructuring Program: Establishing the Energy
Regulation Authority 10/98 208/98
Portugal Energy Assessment (English) 04/84 4824-PO
Romania Natural Gas Development Strategy (English) 12/96 192/96
Private Sector Participation in Market-Based Energy-Efficiency 11/03 274/03
Financing Schemes: Lessons Learned from Romania and International Experiences.
Slovenia Workshop on Private Participation in the Power Sector (English) 02/99 211/99
Turkey Energy Assessment (English) 03/83 3877-TU
Energy and the Environment: Issues and Options Paper 04/00 229/00
Energy and Environment Review: Synthesis Report 12/03 273/03
Arab Republic
of Egypt Energy Assessment (English) 10/96 189/96
Energy Assessment (English and French) 03/84 4157-MOR
Status Report (English and French) 01/86 048/86
Morocco Energy Sector Institutional Development Study (English and French) 07/95 173/95
Natural Gas Pricing Study (French) 10/98 209/98
Gas Development Plan Phase II (French) 02/99 210/99
Syria Energy Assessment (English) 05/86 5822-SYR
Electric Power Efficiency Study (English) 09/88 089/88
Energy Efficiency Improvement in the Cement Sector (English) 04/89 099/89
Energy Efficiency Improvement in the Fertilizer Sector (English) 06/90 115/90
Tunisia Fuel Substitution (English and French) 03/90 --
Power Efficiency Study (English and French) 02/92 136/91
Energy Management Strategy in the Residential and
Tertiary Sectors (English) 04/92 146/92
Renewable Energy Strategy Study, Volume I (French) 11/96 190A/96
Renewable Energy Strategy Study, Volume II (French) 11/96 190B/96
8
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10
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GLOBAL
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